Personal, Housing, Vehicle & Education Loans

On the asset side of retail banking, banks offer a variety of loans to individual customers to meet different needs. These are often called retail loans or consumer loans. They enable people to buy homes, purchase vehicles, pursue higher education, or cover personal expenses, by borrowing and then repaying in instalments.

Personal Loan

A Personal Loan is an unsecured loan granted to individuals based on creditworthiness (income, credit score, repayment capacity) without any collateral. It is commonly used for short-term or emergency financial needs and is processed quickly. The key features of personal loans are as follows:

• Unsecured Nature: No collateral or asset is required. Approval depends mainly on income stability and credit history.
• End-Use Flexibility: Funds can be used for any legitimate personal purpose such as medical expenses, travel, weddings, home renovation, gadget purchases, or debt consolidation.
• Loan Amount & Tenure: Amounts typically range from ₹50,000 to ₹20 lakh or more, depending on eligibility. Tenure is usually 1–5 years (sometimes up to 7 years).
• Interest Rates: Higher than secured loans due to increased risk. Generally range from ~10% to 18% p.a., varying by borrower profile. Mostly fixed-rate, ensuring predictable EMIs.
• EMI-Based Repayment: Repaid through Equated Monthly Installments (EMIs) covering both principal and interest. Fixed EMIs help in budgeting.
• Quick Disbursal & Simple Documentation: Processing is fast, often within 24–48 hours, or even instant for pre-approved customers. Requires basic KYC and income documents.
• Credit Score Sensitivity: Strong dependence on credit bureau scores (e.g., CIBIL). Higher scores (≈750+) lead to better approval chances and lower rates.
• Fees & Penalties: Processing fee usually 1–2% of loan amount. Prepayment or foreclosure may attract charges, especially in early tenure. Late EMIs incur penalties and harm credit scores.
• Prudent Usage: Due to higher interest costs, personal loans should be used judiciously to avoid debt stress.

Housing Loans (Home Loans)

Housing loans are provided for the purchase, construction, or renovation of residential property. They form one of the largest segments of retail lending by value due to high ticket size and long tenure. Home loans are secured loans, with the property mortgaged to the bank until repayment.

Key Features of Home Loans

• Large Loan Amounts: Home loans are typically the largest loans individuals take, ranging from a few lakhs to several crores. Banks finance a portion of the property value based on income and valuation.
• Loan-to-Value (LTV) Ratio: Generally 75–90%.
• As per Reserve Bank of India norms:
  • Up to 90% for small loans (≤ ₹30 lakh)
  • ~80% for mid-sized loans
  • ~75% for high-value loans
• Long Tenure: Tenure usually ranges from 5 to 20–30 years, keeping EMIs affordable. Tenure is often capped by borrower’s age, though a younger co-borrower may extend eligibility.
• Interest Rates: Lower than most retail loans due to secured nature. Typically around 7–10% p.a. (mid-2020s). Most home loans are floating-rate loans linked to an external benchmark (e.g., repo rate), following RBI’s October 2019 external benchmark linkage Fixed-rate loans exist but are limited.
• EMI Repayment & Prepayment: Repaid via EMIs. Early EMIs are interest-heavy, later ones principal-heavy.
  • No prepayment penalty on floating-rate home loans for individuals (RBI direction).
  • Partial and full prepayment allowed.
• Property Evaluation & Disbursement: Banks conduct legal and technical due diligence of property title and approvals. Loan is usually disbursed directly to seller/builder, often in stages for under-construction properties. Borrower pays the margin/down payment first.
• Tax Benefits:
  • Interest deduction: Up to ₹2 lakh p.a. (Section 24) for self-occupied property.
  • Principal repayment: Up to ₹1.5 lakh p.a. (Section 80C).
  • Additional benefits may apply for first-time buyers under specific schemes/budget provisions.
• Government Schemes: Under Pradhan Mantri Awas Yojana (PMAY), the Credit Linked Subsidy Scheme (CLSS) provided interest subsidies for eligible first-time buyers (EWS/LIG/MIG).
• Priority Sector Lending (PSL): Affordable housing loans up to specified limits qualify as PSL, encouraging banks to lend to housing. RBI periodically revises limits (including upward revisions in recent years).

Vehicle Loans (Auto Loans)

Vehicle loans are retail loans provided to individuals for purchasing personal vehicles such as cars and two-wheelers. These are secured loans, with the vehicle hypothecated to the bank until full repayment.

Key Features of Vehicle Loans

• Purpose: Mainly for new vehicles; banks also finance used vehicles at lower LTV and higher interest. Two-wheeler loans are common for first-time and young borrowers.
• Loan Amount & Margin (LTV):
  • New vehicles: ~80–90% of on-road price (price + taxes + insurance + registration).
  • Buyer contributes 10–20% as down payment.
  • Used vehicles: LTV typically 60–80% of assessed value.
• Tenure:
  • Car loans: 1–5 years (up to 7 years in some cases).
  • Two-wheeler loans: 1–3 years.
• Interest Rates: Higher than home loans but lower than personal loans due to collateral. Typically ~8–12% p.a. Rates may be fixed or floating. Dealer-bank tie-ups often offer promotional rates or fee waivers.
• EMI Repayment & Prepayment: Repaid through EMIs. Partial or full prepayment allowed, sometimes with 2–3% foreclosure charges, depending on lender policy.
• Security & Hypothecation: Vehicle is hypothecated to the bank; lender’s name appears on the RC. On full repayment, the bank issues NOC to remove hypothecation. In case of default, the bank can repossess and sell the vehicle after due process.
• Eligibility & Processing: Based on income and credit profile; criteria are slightly more lenient than unsecured loans. Documentation includes KYC, income proof, and vehicle invoice. Processing is often fast, especially at dealerships. Two-wheeler loans may involve minimal documentation.
• Special Schemes: Banks may offer electric vehicle (EV) loans with lower rates or longer tenures to promote green mobility.

Education Loans

Education Loans (Student Loans) are designed to finance higher education in India or abroad. The student is the primary borrower, with a parent/guardian as co-borrower, since students usually have no income. Repayment is expected from the student’s future earnings.

• Coverage: Covers tuition fees and related expenses such as examination/library/lab fees, books, equipment (including laptops if required), travel expenses for overseas study, and living/hostel costs, as per scheme norms.
• Loan Amount & Collateral Norms: Based largely on the IBA Model Education Loan Scheme:
• Up to ₹4 lakh → No collateral, parent as co-borrower
• ₹4 lakh – ₹7.5 lakh → No collateral, but parent as co-obligant
• Above ₹7.5 lakh → Collateral required (property, FD, LIC policy, etc.)For foreign studies, loans can go much higher (₹20–30 lakh or more) depending on course, institution, and security.
• Interest Rates: Generally ~8–12% p.a., usually lower than personal loans but higher than home loans. Often repo-linked with a spread. Some banks offer concessions (e.g., for female students or admission to premier institutions).
• Moratorium Period: A key distinguishing feature. Repayment usually starts after course completion + 6 months to 1 year.
  • During moratorium, interest may be charged but EMI repayment is deferred.
  • Unpaid interest may be capitalized.
  • Post-moratorium repayment tenure typically 5–15 years.
• Co-Borrower & Security: Parent/guardian is mandatory co-borrower. For higher loan amounts, tangible collateral and sometimes a third-party guarantee are required.
• Processing & Eligibility: Requires confirmed admission/offer letter. Banks assess the institution’s reputation, course employability, and family income. Loans for professional and recognized courses are preferred.
• Government Support & Guarantees:
  • Central Sector Interest Subsidy Scheme (CSIS): Government pays interest during moratorium for eligible students from economically weaker sections (loans up to ₹7.5 lakh).
  • Credit Guarantee Fund for Education Loans (CGFEL): Provides credit guarantee for collateral-free loans up to ₹7.5 lakh, encouraging banks to lend.
• Priority Sector Lending (PSL): Education loans up to ₹20 lakh (India or abroad) qualify as PSL, reflecting national priority for higher education.
• Repayment & Risks: EMIs begin once the student starts earning. Banks may restructure in genuine hardship cases. NPAs have occurred due to job market issues or overseas defaults, but overall education loans play a crucial role in social mobility.