What are the different types of loans?

According to the RBI, banks have written off over Rs 2 lakh crore of bad loans in the fiscal ended March 2021. Find out more about the types of loans and when they are categorized as bad


People borrow money for various reasons. It could be to expand their business, to fund higher education, to buy a home or car, to get a ring for their girlfriend or wife.

Loans generally fall into two categories, secured and unsecured. Let us first understand what a secure loan is.

Secured loans are those for which a borrower keeps some asset as surety or collateral to borrow money. Collateral can be your car, your home, or anything that is valuable.

It simply means that in the event of default, the lender can use the asset to repay the funds it has advanced the borrower.

Common types of secured loans are mortgages and auto loans, in which the item being financed becomes the collateral for the financing. With a car loan, if the borrower defaults on the payment, the loan issuer can seize the vehicle.


When an individual or business takes a mortgage, the property in question is used to back the repayment terms. In fact, the lending institution maintains equity in the property until the mortgage is paid in full. If the borrower defaults on the payments, the lender can seize the property and sell it to recoup the funds owed.

Presently, let us talk about unstable credits. Not at all like got advances, unstable credits are taken without keeping insurance. Assuming that the borrower defaults on this kind of obligation, the bank starts a claim to gather what is owed. Banks give assets in an unstable advance exclusively on the borrower's reliability and guarantee to reimburse.

Banks charge a higher financing cost on unstable credits as they are high danger. Likewise, FICO rating and outstanding debt compared to revenue prerequisites are typically stricter for these kinds of credits.

While giving unstable advances, banks actually take a look at record as a consumer of the borrower. Any previous default might prompt the crossing out of the advance. Aside from that, the borrower's monetary condition is likewise looked at to find assuming he will actually want to reimburse the advance.

Examples of unsecured loans are a personal loan, education loan, and credit card transactions. And when a bank finds that a loan or outstanding money owed are no longer recoverable, it marks is as a bad loan.

The RBI recently said in an RTI reply that banks have written off a whopping Rs 11,68,095 crore worth of bad loans in the last 10 years. Apparently, most of them were unsecured loans.

People who don’t want to pledge their assets or don’t have property to apply for a secured loan, opt for the unsecured loan. It is a good option if you are looking for immediate cash.


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