Bank Loans in India: Types, Interest Rates & Application Guide

Introduction: Borrowing Smart

When Rakesh wanted to buy his dream home in Noida, he needed ₹80 lakhs. When Priya’s daughter got admission to an engineering college, education expenses ran into ₹15 lakhs. When Arjun needed ₹3 lakhs for his sister’s wedding, he turned to his bank.

Bank loans bridge the gap between your needs and your savings. But with dozens of loan types, varying interest rates, and complex terms, borrowing can be overwhelming. This guide helps you understand different loan types, compare options, and borrow wisely.

Types of Bank Loans

Secured vs Unsecured Loans

Secured Loans:

• Backed by collateral (asset pledged)
• Lower interest rates
• Examples: Home loan, Car loan, Gold loan

Unsecured Loans:

• No collateral required
• Higher interest rates
• Examples: Personal loan, Credit card debt

Overview of Loan Types

Home Loan

What is a Home Loan?

A long-term loan to purchase, construct, or renovate a residential property. The property itself serves as collateral.

Types of Home Loans

1. Home Purchase Loan

• Buy ready-to-move or under-construction
• Most common type

2. Home Construction Loan

• Build on your own land
• Disbursed in stages

3. Home Extension Loan

• Add rooms to existing home
• Expand living space

4. Home Renovation Loan

• Repair and upgrade
• Lower ticket size

5. Balance Transfer

• Move loan to new bank
• Get better rates

Current Interest Rates (2024)

Rates vary based on credit score, loan amount, customer profile

Eligibility Criteria

Loan Amount Calculation

FOIR (Fixed Obligation to Income Ratio):

• EMI should not exceed 40-50% of income
• Existing EMIs considered

LTV (Loan to Value):

Example:

Monthly Income: ₹1,00,000
Existing EMI: ₹10,000
Available for Home EMI: ₹40,000 (40% of income)
Maximum Loan (20 years, 8.5%): ~₹52 lakhs

Documents Required

Salaried:

• Identity proof (Aadhaar, PAN)
• Address proof
• Last 6 months salary slips
• Last 2 years Form 16
• Last 6 months bank statement
• Employment letter

Self-Employed:

• Identity and address proof
• Last 3 years ITR
• Business proof (registration, GST)
• Last 12 months bank statement
• P&L and Balance Sheet

Property Documents:

• Sale deed/Agreement
• NOC from society
• Approved plan
• Title documents
• Previous chain of ownership

Tax Benefits

Home Loan Tips

✅ Compare rates across multiple banks ✅ Negotiate processing fees ✅ Choose floating rate (usually better long-term) ✅ Make prepayments when possible ✅ Don’t stretch tenure too long ✅ Check builder credibility for under-construction

Personal Loan

What is a Personal Loan?

An unsecured loan for personal needs—no collateral required. Can be used for any purpose (wedding, travel, medical, debt consolidation).

Key Features

Current Interest Rates (2024)

Rate depends on income, credit score, relationship with bank

Eligibility

When to Take Personal Loan?

✅ Good Reasons:

• Medical emergency
• Debt consolidation (if lowering overall interest)
• Home renovation
• Wedding (within budget)
• Short-term urgent need

❌ Avoid For:

• Vacations (save instead)
• Gadgets (can wait)
• Investments (never borrow to invest)
• Daily expenses (fix budget instead)

Personal Loan Tips

✅ Check credit score first ✅ Compare rates from multiple lenders ✅ Negotiate processing fees ✅ Choose shorter tenure if affordable ✅ Avoid multiple loan applications simultaneously ✅ Read prepayment terms carefully

Car Loan / Vehicle Loan

What is a Car Loan?

A secured loan to purchase a vehicle. The car serves as collateral until the loan is repaid.

Types of Vehicle Loans

1. New Car Loan

• For brand new vehicles
• Lower interest rates
• Higher LTV (up to 100%)

2. Used Car Loan

• For pre-owned vehicles
• Higher interest rates
• Lower LTV (70-85%)
• Car age restrictions

3. Two-Wheeler Loan

• For bikes and scooters
• Smaller ticket size
• Higher interest rates

Interest Rates (2024)

Eligibility

LTV (Loan to Value)

Car Loan vs Personal Loan for Car

Verdict: Car loan is usually better due to lower interest.

Education Loan

What is an Education Loan?

A loan to finance higher education expenses including tuition, accommodation, books, and other costs.

Types Based on Study Location

1. Domestic Education Loan

• For studies in India
• IITs, IIMs, medical, engineering, etc.
• Lower loan amounts typically

2. Study Abroad Loan

• For overseas education
• Higher loan amounts
• Additional documentation

Current Interest Rates (2024)

Interest subsidy available for economically weaker sections

Collateral Requirements

Expenses Covered

✅ Tuition fees ✅ Examination fees ✅ Library and lab fees ✅ Books and equipment ✅ Travel expenses (study abroad) ✅ Hostel accommodation ✅ Insurance ✅ Caution deposit

Moratorium Period

What is Moratorium? Period during which EMI payment is not required:

• Course duration + 6-12 months after completion
• Simple interest may accumulate

Repayment Timeline:

Course (4 years) + Moratorium (1 year) = 5 years no EMI
Then: Repayment over 5-15 years

Tax Benefits

Education Loan Tips

✅ Start application early (3-6 months before admission) ✅ Keep all documents ready ✅ Compare rates across banks ✅ Consider SBI, PSBs for competitive rates ✅ Understand moratorium interest impact ✅ Get co-borrower (parent) for better terms

Gold Loan

What is a Gold Loan?

A secured loan where gold jewelry/ornaments are pledged as collateral. Quick disbursement, no income proof required.

Key Features

Major Gold Loan Providers

Bank rates generally lower than NBFCs

When to Take Gold Loan?

✅ Good For:

• Short-term urgent needs
• Business working capital
• Medical emergencies
• Agricultural expenses
• When you have gold lying idle

❌ Caution:

• Don’t lose gold for frivolous needs
• Compare interest rates carefully
• Understand auction risk

Gold Loan vs Personal Loan

Business Loan

Types of Business Loans

1. Working Capital Loan

• Day-to-day operations
• Inventory, payroll, rent
• Short-term

2. Term Loan

• Equipment, expansion
• Fixed tenure
• EMI-based repayment

3. MUDRA Loan

• For micro enterprises
• Up to ₹10 lakh
• Government scheme

4. Overdraft

• Withdraw as needed
• Pay interest on usage
• Revolving facility

MUDRA Loans

Features:

• No collateral
• No processing fee
• Lower interest rates
• All banks participate

MSME Loan Interest Rates

Loan Against Property (LAP)

What is LAP?

A secured loan where you mortgage your property (residential/commercial) but continue to use it. Lower rates than personal loans.

Key Features

LAP vs Home Loan

How Interest Rates Work

Fixed vs Floating Rate

Fixed Rate:

• Remains same throughout tenure
• Predictable EMIs
• Usually higher initially
• Less common for home loans

Floating Rate:

• Changes with market rates
• Linked to benchmark (EBLR/MCLR)
• EMIs vary
• Usually lower initially

Understanding EBLR/MCLR

EBLR (External Benchmark Lending Rate):

• Linked to repo rate
• Faster transmission of rate changes
• Current method for new loans

Example:

Repo Rate: 6.50%
Bank's Spread: 2.00%
Your Spread: 0.30%
Your Rate: 6.50% + 2.00% + 0.30% = 8.80%

MCLR (Marginal Cost of Funds Based Lending Rate):

• Bank’s cost of funds based
• Slower transmission
• Being phased out

EMI Calculation

EMI Formula: EMI = P × r × (1+r)^n / ((1+r)^n - 1)

Where:

• P = Principal
• r = Monthly interest rate
• n = Number of months

Example: ₹50 lakh, 8.5%, 20 years

Monthly Rate = 8.5%/12 = 0.708%
Number of Months = 240
EMI = ₹43,391

Impact of Interest Rate Change

₹50 lakh loan, 20 years:

0.5% increase = ₹4 lakh more interest!

Improving Loan Eligibility

Boost Your Credit Score

• Pay existing EMIs on time
• Keep credit utilization low
• Don’t close old credit cards
• Check credit report for errors
• Avoid multiple loan applications

Increase Loan Amount Eligibility

• Add co-applicant (spouse’s income)
• Show all income sources
• Reduce existing obligations
• Choose longer tenure (but pay more interest)
• Improve credit score

Get Better Interest Rates

• Maintain 750+ credit score
• Have salary account with lending bank
• Show stable employment
• Provide collateral where possible
• Negotiate (especially for large loans)

Key Takeaways

1. Secured loans are cheaper – Use when possible
2. Credit score matters – 750+ gets best rates
3. Compare before borrowing – Rates vary significantly
4. Read fine print – Processing fees, prepayment charges
5. Don’t overborrow – Keep EMI within 40% of income
6. Prepay when possible – Saves interest, reduces tenure
7. Claim tax benefits – Home loan, education loan

Disclaimer

This article is for educational purposes only. Loan rates and terms change frequently. Verify current offerings with banks before applying. This is not financial advice. Borrowing involves repayment obligations—assess your capacity before taking loans.

Frequently Asked Questions

Q: What credit score is needed for a loan? A: 700+ for approval, 750+ for best rates.

Q: Can I prepay my loan? A: Yes, most loans allow prepayment. Floating rate home loans have no prepayment penalty.

Q: Which loan has lowest interest? A: Home loans (secured, long-term) have lowest rates, typically 8-9%.

Q: Can I get a loan without income proof? A: Gold loan requires no income proof. Others require documentation.

Q: Is it better to take loan from my salary bank? A: Often yes—faster processing, sometimes better rates for existing customers.

Q: How many loans can I have simultaneously? A: No legal limit, but more loans = higher FOIR = lower eligibility for new loans.

Bank loans are powerful financial tools—they can help you own a home, fund education, or bridge temporary needs. The key is borrowing wisely, comparing options, and ensuring you can comfortably repay.