Types of Loans and Which to Choose

Life is full of big dreams – a car, a cozy home, or a shiny new bike. But waiting to save up to indulge in these pleasures may take a considerable amount of time. And sometimes, life doesn’t wait – unexpected emergencies or urgent needs can arise when your savings aren’t quite ready. Whether it’s pursuing dreams or handling surprises, the question remains: how do you fund these expenses? That’s where loans come in!

What is a Loan?

Banks offer different types of loans tailored to different possible needs. Say you’re a young professional who suddenly faced unexpected medical expenses. Instead of cutting through your savings, you could explore personal loans and find the one that best suits your repayment capacity. This will allow you to manage the situation without financial stress.  

Definition: A loan is basically a certain amount of money you borrow from a bank or financial institution, which you have to repay along with an interest amount.

Here are some key things to understand about loans:

• Purpose of Loan: A car loan would be taken to buy a vehicle, while a personal loan covers various personal needs. 
• Collateral: This is an asset pledged as security. For example, home and vehicle loans are secured by the asset in itself, while personal loans are usually unsecured. 
• Interest rates: This is the cost of borrowing money, usually as a percentage of the loan amount. It depends on the loan type and your creditworthiness. 

These key details about the purpose, collateral, and interest rates of loans can help you choose the best loan for your needs. Let’s break down the different loan options available so you can pick the best one for your requirement.

1. Personal Loan

• Best for: Various personal needs like covering medical expenses or funding travel
• Key Features: 
  • Unsecured (no collateral required)
  • Loan amount and interest rate depend on your credit score and repayment ability
  • Interest rates vary based on lender policies and your financial profile

2. Loan Against Mutual Funds 

• Best for: Borrowing money by pledging your mutual fund investments as collateral, keeping your investments intact
• Key Features:
  • Your mutual funds remain invested while you access funds
  • No hassle and potential loss of selling your investments
  • Avoids exit loads from redeeming mutual fund schemes

3. Car Loan 

• Best for: Buying a used vehicle, or to get funds using your existing car as collateral
• Key Features:
  • Car serves as collateral
  • Lower interest rates than unsecured loans
  • Loan amount depends on the value of the car and your financial profile

4. Bike Loan 

• Best for: Buying a new motorcycle or scooter or get cash against your bike
• Key Features: 
  • The two wheeler serves as collateral. 
  • Interest rates are usually lower since the loan is secured
  • Loan amount depends on the value of the bike and your financial profile. 

5. Home Loan and Loan against property

• Best for: Buying a property or to borrow funds with the existing property as collateral
• Key Features:
  • High loan amounts with long repayment tenures (up to 30 years)
  • Competitive interest rates due to the secured nature of the loan
  • Loan Against Property (LAP) allows you to access funds without selling it

6. Gold Loan 

• Best for: Quick access to funds using gold as collateral
• Key Features:
  • Loan amount based on the gold’s market value and purity (usually up to 80%).
  • Typically requires 18-24 carats
  • Loan amount depends on the quality of gold and current market rate

Loan Comparison

Here’s a table summarizing the loan types, what they are, and their key features:

Repayments for all secured & unsecured loans are typically automated through AutoPay set up with the lender. Remember to maintain sufficient funds to avoid penalties and protect your credit score. 

Whether it’s for a big purchase or an emergency, PhonePe Lending makes borrowing simple, fast, and stress-free. If you would like to apply for a loan, check out loan options on the PhonePe app and take the first step toward your goal!  

Disclaimer: Opinions expressed and information provided here are for educational and reference purposes only and are not to be considered as financial or legal advisory. Please reach out to your financial institution, Credit Information Companies, and/or financial advisor before taking any steps/actions. PhonePe Lending Services Private Limited (“PhonePe Lending”) does not confirm or warrant for any correctness or validity of the information provided here under independent research. The banks and lenders are not responsible for any content posted on this site and do not endorse or guarantee any reviews.