For many major life events, buying a home, starting a business, financing an education, or opening a simple savings account just won’t help. But there is a solution for it, and it involves borrowing money. A loan is the amount that is borrowed from a lender to fulfill needs.
Nowadays, loans are available in many types depending on the purpose or interest rate. In this guide, we will break down the primary types of loans, from personal and auto loans to student debt and mortgages, and explain exactly how they work.
Home Loans
Purpose: Home loans provide money to help individuals buy, build, or renovate a home by borrowing a large sum from a lender. It is repaid over time in installments, with the property itself serving as collateral. This financial tool makes homeownership accessible by splitting the cost, offering benefits like long repayment terms and tax advantages, while allowing lenders to secure their investment through the home.
Features: Home loans are secured because they involve the home as collateral. The payment plan is for many years, like 15-30. Payments are made monthly, covering the interest. Home loans are more affordable than personal loans.
Personal Loans
Purpose: These loans provide a significant amount of cash for individual needs. It allows you to cover large expenses into manageable, fixed monthly payments with a set interest rate. Personal loans are ideal for home renovations, weddings, medical bills, and emergencies. It offers financial flexibility for planned or unplanned expenses.
Features: You can receive funds at once and can pay back with consistent monthly amounts. Personal loans don’t require collateral. It requires less paperwork compared to secured loans, usually just ID and income proof. A strong credit score can help you secure the best rates.
Auto Loans
Purpose: Auto loans are secured loans for vehicles featuring fixed monthly payments, a set interest rate (APR), and a specific duration, using the car as collateral. The lenders can repossess if you can’t pay the money.
Features: It involves financing for new/used cars, with flexible tenures (1-7+ years), varying down payments, and options for prepayment, with your credit score heavily influencing terms. Lenders offer different payment structures.
Student Loan
Purpose: Student loans provide funds for higher education, tuition, books, and living costs. It has flexible repayment options, lower interest rates, tax benefits, and income-driven repayment plans where payments are based on earnings.
Features: The best part is that the payment begins after leaving school. The interest rates can be fixed or vary. The funds directly go to the school for tuition.
What is the Loan Process
The following is the step-by-step process of applying for a loan:
- Application
Choose the loan type and, according to your needs, fill out the form.
- Documentation
Submit ID, proof of income (pay stubs, tax returns), bank statements, and other financial records.
- Underwriting
Lenders verify your details, check your credit score, debt-to-income ratio, and assess your ability to repay.
- Approval
If approved, you get a formal offer with terms (interest rate, amount, tenure) in a letter.
- Disbursement
The lender deposits the loan amount.
- Repayment
You make regular payments (EMIs) covering principal and interest until the loan is paid off.
