Loans
From home ownership to higher education — understand every type of bank loan, how interest works, what lenders evaluate, and how to get the best rates.
Understanding Bank Loans
A loan is a financial product where a bank lends you a sum of money at an agreed interest rate, to be repaid over a defined period in Equated Monthly Installments (EMIs). Banks evaluate your creditworthiness before approving a loan based on your income, CIBIL score, existing obligations, and the purpose of the loan.
EMI Formula: EMI = [P × R × (1+R)^N] / [(1+R)^N – 1] where P = Principal, R = Monthly interest rate (annual rate ÷ 12 ÷ 100), N = Number of months.
Types of Bank Loans
Home Loan
The largest and most common loan product — used to purchase, construct, or renovate residential property. Secured against the property itself.
- Loan amount: Up to 90% of property value (for loans < ₹30L)
- Interest rate: 8.4% – 10.5% p.a. (floating)
- Tenure: Up to 30 years
- Tax benefit: Sec 80C (principal), Sec 24 (interest)
- Processing fee: 0.25% – 1% of loan amount
Personal Loan
Unsecured loan for any personal purpose — medical expenses, travel, wedding, home renovation. No collateral required but higher interest rates.
- Loan amount: ₹50,000 – ₹50 lakh
- Interest rate: 10.5% – 24% p.a.
- Tenure: 1 – 7 years
- Eligibility: CIBIL 700+, stable income
- Disbursal: Within 24–72 hours
Vehicle Loan
Loans for purchasing two-wheelers, cars, or commercial vehicles. The vehicle itself serves as collateral.
- New car: Up to 100% of on-road price
- Used car: Up to 80% of assessed value
- Interest rate: 7.9% – 15% p.a.
- Tenure: 1 – 7 years
- Disbursal: 24–48 hours at dealership
Education Loan
Finances higher education in India and abroad. Moratorium period (study period + 6 months) before repayment begins is a key feature.
- India: Up to ₹20 lakh (no collateral < ₹7.5L)
- Abroad: Up to ₹1.5 crore with collateral
- Interest rate: 8.5% – 14% p.a.
- Tax benefit: Sec 80E — interest deductible for 8 years
- Moratorium: Study period + 6–12 months
Loan Against Property (LAP)
Use your existing property as collateral to get large amounts at lower interest rates. Property remains in your use; bank holds legal title.
- Loan amount: Up to 70% of property value
- Interest rate: 9% – 13% p.a.
- Tenure: Up to 15–20 years
- Purpose: Business expansion, medical, education
- Residential, commercial, industrial property accepted
Gold Loan
Instant loan against physical gold jewellery. Fastest approval, no income proof needed. Bank holds gold in safe custody until repayment.
- Loan to Value: Up to 75% of gold value (RBI cap)
- Interest rate: 7.5% – 18% p.a.
- Tenure: 3 months to 3 years
- Disbursal in minutes with zero paperwork
- Best for urgent short-term cash needs
Loan Interest Rate Types
Fixed Rate
Interest rate stays constant throughout the loan tenure regardless of market changes. EMI remains predictable.
Pros: Certainty, protection from rate hikes
Cons: Usually higher than floating rate; no benefit when rates fall
Best for: Conservative borrowers, short tenure loans
Floating Rate
Linked to an external benchmark (RBI repo rate via EBLR or MCLR). Changes with market rate movements.
Pros: Lower starting rate, benefit when rates fall
Cons: EMI may increase if rates rise
Best for: Long tenure loans, rate-sensitive borrowers
RBI Mandate (Oct 2019): All new floating rate retail loans and MSME loans must be linked to an External Benchmark Lending Rate (EBLR) — typically the RBI Repo Rate + spread. This ensures faster transmission of RBI rate changes to borrowers.
Loan Eligibility Factors
CIBIL / Credit Score
Score of 750+ gets best rates. Below 650 leads to rejection or very high rates. Check your score for free at CIBIL.com.
Income & Employment
Stable employment (salaried minimum 2 years) or business vintage (minimum 3 years) is key. Higher income = higher loan eligibility.
Existing Obligations
Total EMIs including new loan should not exceed 40–50% of gross monthly income (FOIR ratio).
Age
Typically 21–65 years at loan maturity. Younger applicants get longer tenures; older applicants may face shorter tenures.
Collateral / Security
For secured loans, the asset quality, valuation, and title clarity are critical. Clean title = faster approval.
Loan Purpose
Banks scrutinize the end-use of funds, especially for business loans. Productive use (income-generating) gets priority.