Page 107 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes 7.3 Classification of Loans – Purpose-wise

Almost all the banks in our country give the following loans:

Figure 7.2: Purpose-wise Classification of Loans

Classification of
Loans – Purpose wise

Education Loan
Personal Loan
or Student Loan
Car Loan or
Auto Loan Home Loan
Loan against
Shares

Source: C. Gulati Neelam (2010), ”Principles of Banking Management”, Excel Books.
1. Personal loan/Consumer loans: Consumer loans granted for personal (medical), family
(education, vacation), or household (extension, repairs, purchase of air conditioner,
computer, refrigerator, etc.) use, as opposed to business or commercial use. Generally,
these loans are used for debt consolidation, or to pay for vacations, education expenses, or
medical bills, and are amortized over a fixed term with regular payments of principal and
interest. Such loans are either unsecured, or secured by the asset purchased or by a cosignor
(guarantor). Unsecured loans (called signature loans) are advanced on the basis of the
borrower’s credit-history and ability to repay the loan from personal income. Repayment
is usually through fixed amount installments over a fixed term. Also called consumer
loan.

2. Car loan or auto loan: It is a personal loan to buy a car. Almost all the banks give car loan,
which is also termed as auto loan. It is one of the fast moving financial products of banks.
Car loan/auto loan are sanctioned to the extent of 85% upon the ex-showroom price of the
car with some simple paper work and a small amount of processing fee.
3. Loan against shares: Loan against shares can be obtained very easily. It is given on basis
of a liquid guarantee.
4. Home loan: It is a personal loan to buy a house. Home loan is the latest craze in the
banking sector with the development of the new infrastructure. Now people are moving
to township outside the city. More townships are coming up to meet the demand of ‘house
for all’.

Notes The RBI has also liberalised the interest rates on home loans in order to match the
repayment capability of even middle class people.
Almost all banks are dealing in home loans. SBI, ICICI, HDFC, HSBC are leading home
loan providers.
5. Education loan: Till some years back, higher education and quality education was not
affordable to many brilliant students because of the financial problems. There was no

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