Common Types of Loans in India and How Their Interest Rates Affect Your EMI

Loans play an important role in helping people achieve significant life goals. Whether it’s for buying a house, expanding your business, pursuing your higher education, sending your kid abroad for studies or handling medical emergencies. But before you take any loan, you must understand the various types of loans, their interest rates, tax benefits, and other components.

Before you borrow, know your loan—what you need, why you need it, and how much it’ll cost you!

Let us begin!

What is a Loan?

A loan is a financial agreement in which one party, usually a bank or a financial institution, lends money to another party i.e. you and your co-borrower. 

The borrower agrees to repay the amount over a specified period, along with an additional cost known as interest. The repayment is generally done in regular instalments known as EMIs (Equated Monthly Instalments).

Every loan involves two key components:

• Principal – The actual amount borrowed.
• Interest – The cost paid by the borrower for using the lender’s money

Key Components of a Loan

What makes up your loan?

It’s not just the amount you borrow. Interest rates, tenure, EMIs, and fees all play a role. 

When taking a loan, it is essential to understand the different parts that make up the loan structure:

1. Principal Amount

This is the original sum of money that the borrower receives from the lender. All interest calculations are based on this amount.

2. Interest Rate

This is the percentage charged by the lender on the principal amount. It is the cost of borrowing money and can vary based on the loan type, borrower profile, and market conditions.

3. Loan Tenure

This is the time period over which the loan must be repaid. Longer tenure usually means lower EMIs but higher total interest paid.

4. EMI (Equated Monthly Instalment)

This is the monthly payment made by the borrower to repay both the principal and the interest over time.

5. Processing Fee

Lenders often charge a one-time fee to process the loan application.

6. Collateral

This is a security or asset that the borrower pledges in case of secured loans. If the borrower defaults, the lender can recover the money by selling the collateral.

7. Prepayment and Foreclosure Charges

Some lenders charge a fee if the borrower chooses to repay the loan before the agreed tenure ends.

Types of Loans

Loans are not just money. They’re long-term commitments. You need to choose wisely.

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Loans in India are broadly classified into two categories:

1. Secured Loans

These loans are backed by collateral. This means you need to pledge an asset such as property, gold, or fixed deposits to get the loan. If you fail to repay, the lender can take possession of the pledged asset.

Common Types of Secured Loans:

Home Loan

These are taken to buy, build, or renovate a house or flat. The house acts as collateral. Home loans usually have low interest rates and long repayment tenures, going up to 30 years.

Loan Against Property (LAP)

You mortgage a residential or commercial property to raise funds. The loan can be used for business, education, or personal needs. Since the property is pledged, interest rates are lower than unsecured loans.

Gold Loan

You deposit gold ornaments or coins with the bank and get a loan based on the gold’s value. Gold loans are easy to get, have flexible repayment options, and are commonly used in rural and semi-urban India.

Car or Vehicle Loan

Taken to buy a new or used vehicle. The vehicle itself acts as collateral. If you fail to repay, the bank can repossess it.

Loan Against Fixed Deposit

If you have a fixed deposit, you can get a loan against it without breaking the FD. Interest is usually 1–2% higher than the FD rate.

2. Unsecured Loans

These loans are not backed by any asset. Because there is no collateral, banks take more risk, and interest rates are higher. Approval depends mainly on your income, credit score, and repayment capacity.

Common Types of Unsecured Loans:

Personal Loan

These are used for any personal need, e.g., medical expenses, wedding costs, travel, home repairs, etc. These are easy to get but come with higher interest rates and shorter tenures.

Education Loan

These help students finance their higher studies in India or abroad. Usually taken by the student and co-signed by a parent or guardian. No collateral is needed for smaller amounts, but higher education loans may require security.

Credit Card Loan

These are offered as an instant loan on your existing credit card. Useful for short-term needs, but interest rates are among the highest.

Business Loan

For self-employed individuals or small businesses to expand operations, buy equipment, or manage cash flow. No collateral is required for small amounts, but large loans may need financial records and business plans.

Secured vs Unsecured Loans: How Do They Differ

Here is a basic difference between the secured and unsecured loans in India!

Feature	Secured Loan	Unsecured Loan
Collateral Required	Yes, assets like property or car	No collateral needed
Interest Rates	Generally lower	Generally higher
Loan Amount	Usually higher	Usually lower
Approval Time	Can take longer due to asset verification	Faster approval
Risk to Lender	Lower, backed by collateral	Higher, no collateral
Risk to Borrower	Risk of losing assets if default	No asset loss, but credit score affected

Types of Interest Rates

Not all loans are the same. Each type of loan comes with its own interest rates and rules.

Understanding which loan suits your needs and how interest works can help you borrow smarter and pay less.

1. Fixed Interest Rate:

The rate stays the same for the entire loan period. Your EMI won’t change, so it’s easier to plan your monthly budget.

2. Floating Interest Rate:

The rate can go up or down based on market conditions. Your EMI may increase or decrease over time. It’s riskier but can save you money if rates fall.

Which Loan Has Low Interest?

Home loans usually have the lowest interest rates, starting around 7.85% per year, while personal loans can go as high as 44% due to being unsecured. 

Balance your expenses wisely first so you can choose loans with manageable repayments.

Try the 50-30-20 rule of budgeting!

Additionally, gold and car loans fall in the middle, offering rates between 8%–10%. Generally, secured loans like home or gold loans are cheaper than unsecured ones like personal or business loans.

Loan Type	Interest Rate Range (Approx.)
Home Loan	8.5% – 9.5% p.a.
Education Loan	9.5% – 13.5% p.a.
Car Loan	8.5% – 11.5% p.a.
Personal Loan	10.5% – 18% p.a.
Gold Loan	8% – 12.5% p.a.
Business Loan	11% – 18% p.a.
Loan Against Property	9% – 11% p.a.

Lowest interest loans: Usually home loans, gold loans, or loans against property, since they are backed by collateral.

Tax Benefits on Loans in India

Some loans help you save tax under the Income Tax Act. 

1. Home Loan

• Principal Repayment (Section 80C): Deduction up to ₹1.5 lakh per annum.
• Interest Payment (Section 24(b)): Deduction up to ₹2 lakh per annum for self-occupied properties.
• Additional Deduction (Section 80EE): Up to ₹50,000 per annum for first-time homebuyers with loan amounts up to ₹35 lakh and property value up to ₹50 lakh.
• Affordable Housing (Section 80EEA): Additional deduction up to ₹1.5 lakh per annum for properties valued up to ₹45 lakh.
• Joint Home Loans: Each co-borrower can claim deductions individually under Sections 80C and 24(b).

2. Education Loan

Interest Payment (Section 80E): Full deduction on interest paid for up to 8 years, applicable to loans taken for higher education in India or abroad.

3. Business Loan

Interest Payment: Interest paid on business loans can be claimed as a business expense, reducing taxable income.

Note: Tax benefits are typically available under the old tax regime. Under the new regime, many deductions are not applicable. It’s advisable to consult a tax professional to determine the most beneficial option for your financial situation.

How Your Credit Score Affects Loan Approval & Interest Rates

A credit score above 750 signals strong financial health to lenders. It improves your chances of loan approval because lenders see you as low-risk. With a high score, you are more likely to get loans faster and at lower interest rates. This saves you money over the loan term and speeds up the approval process.

How to Choose the Right Loan

Selecting the right loan depends on the purpose, financial ability, and future repayment capacity of the borrower. Here are a few important points to consider:

• Understand the need: Is the loan required for a personal emergency, home purchase, education, or business expansion?
• Assess repayment capacity: Use EMI calculators to understand how much you will need to pay every month.
• Compare interest rates: Always check and compare interest rates offered by different banks and NBFCs.
• Check tax benefits: Select loans that provide tax deductions to reduce your overall financial burden.
• Read all terms and conditions: Understand hidden charges, prepayment clauses, and penalties.

Conclusion

Loans, when chosen wisely and used responsibly, can be a powerful tool for financial growth. 

From purchasing a dream home to investing in a business or funding higher education, loans can open doors to many opportunities. 

However, understanding the types of loans, the difference between secured and unsecured options, the types of interest rates, and the tax benefits is essential before making any financial commitment.

A well-informed borrower is always in a better position to make decisions that lead to long-term financial stability.

What are the Various Types of Loans: FAQs