It’s a fast-paced world out there. With the material-driven life zooming past us, money becomes the quintessential currency to navigate through it.
It often is the case that while moving through life, some commodities and assets become the need of the hour. It can be a house, a bike or any other thing. If at that moment, you do not possess the funds necessary to purchase that item, you risk missing out and falling behind in the race of life.
Consumer Loans are aid packages provided by different financial institutions to people in need of such immediate financial help. This article will discuss what a consumer loan is and how many types of consumer loans there are.
Definition of consumer loan
A consumer loan is basically a certain amount of money borrowed from NBFCs, banks, or other financial institutions to secure the possession of an essential item.
The consumer loan is taken by the people who do not have enough money to pay for commodities they need immediately, upfront. The debt repayment is spaced out between months or years depending on the magnitude of the loan and the plans offered by the concerned banks and other financial institutions. Consumer loans are almost always subject to the charging of an added interest, imposed as a fee.
Example: For instance, a person wants to buy a laptop worth INR 60,000. His monthly income is INR 20,000. As such, he can’t pay the money upfront. He may avail of an EMI plan to pay the cost through installments of INR 6000 per month for 10 months. Depending on the EMI scheme, interest may or may not be imposed on the debt. This is a common example of a consumer loan.
The different types of consumer loans
There are different approaches to categorizing consumer loans. Consumer loans can be differentiated according to the method of insurance or the utility of the loan. They may also be differentiated based on how their tenures are defined and demarcated.
Types of consumer loans according to insurance mode
Fundamentally according to insurance methods, consumer loans can be of two varieties. These are,
Secured loans:
Some loans are given out only after the recovery of the debt is ensured. Those are secured loans. A property or several properties belonging to the borrower is pledged to the bank or other financial institution.
If a customer fails to repay the debt within a designated period, the bank or financial institution will assume ownership of that property or property and use it or those as they please to recover the amount given away by them as a loan.
Example: Mortgages are a typical example of secured loans.
Unsecured loans:
Unsecured loans are monetary aids given by financial institutions without securing any existing property of the borrower as collateral.
These loans are not unsecured as the financial institutions have other methods like high-interest rates to ensure the incurred debt is repaid properly and risks are mitigated as much as possible.
Types of consumer loans according to utilities
Another way of categorizing consumer loans is through the way the borrower will use them. These can be,
Housing loans:
These loans are taken with the specific intention of building or purchasing real estate.
Usually, these loans are secured against the property being purchased or constructed. These are loans with lengthy tenures. Usually, interest rates are low on such loans.
Student loans:
These are the loans taken with the express intention of financing higher studies abroad or in a costly educational institution. Everything from tuition fees to living expenses of the student comes under its purview.
Car loans:
As can be deducted from the name, this is a loan taken when one wishes to purchase a two-wheeler or four-wheeler vehicle but lacks the proper funds. Depending on the bank’s tenure period and credit scores, you may get very accessible interest rates on these loans.
Personal loans:
These are unsecured loans given to the customers for various usage as deemed fit by them. They usually come with very lenient interest rates and flexible tenures.
You can find several Indian financial institutions like NBFCs and online apps that grant instant personal loans to those in need. Money View is one such online personal loan solution that ensures effective disbursement of personal loans within a very short period and without the hassle of extensive paperwork or documentation.
Types of loans according to tenure implementation
Open-ended loans:
For these kinds of loans, tenure is not fixed. Instead, it is flexible, allowing it to be stretched indefinitely. The consumer has the freedom to use this money as they deem fit.
These loans are generally of the unsecured variety.
As long as the customer keeps paying a necessary amount consisting of part principal loan and part interest and pays these dues within the designated deadlines, the tenure may get extended.
However, if the deadlines are missed, the extra interest is piled onto the debt as a charge.
A credit card loan is an excellent example of such an open-ended loan.
Closed-ended loans:
Closed-ended loans come with tenures that are distinct, strict, and well defined. The money to be paid per month over this period is also uniformly distributed.
In most cases, such loans are secured by signing on one or more of the borrower’s assets as collateral if payments are missed.
Home loans are an excellent example of such closed-ended loans. The money granted is used explicitly for housing purposes. If the installments are not timely paid, the bank has full rights to take possession of the home.
Pros and Cons of availing consumer loans:
Pros:
- A consumer loan can be of tremendous help in urgent situations.
- They help you to manage your financial burden by distributing the load over a long period.
- They can provide tax benefits and many more such tertiary advantages.
- Availing of a loan and making timely payments will help you improve your relationship with the bank significantly, adding to your credit scores.
Cons:
- Incurring debt is always a bad idea as it makes you dependent on someone else, increasing personal stress.
- If the interest rates turn out unexpectedly, it can cost you significantly more money than what it would have cost you if you had paid the price upfront.
- If you miss payments because of any reason, the situation will get even worse. Additional interest and payment defaulting charges will add more pressure on you financially.
Conclusion:
Loans can be a very confusing and convoluted matter for the uninitiated. For those entering the world of economics, the types, implementations, and implications of the numerous kinds of consumer loans can be pretty overwhelming.
Even after understanding the types of loans, it is always advisable to research the various fine prints, terms, and conditions associated with them, before jumping unprepared into a scheme.
So do your homework, make your plans and take the loans that best suit your whims and necessities.
