Types of Loans in Finance Companies and How They Earn Profits
Finance companies and Non-Banking Financial Companies (NBFCs) are rapidly growing in India. With millions of people depending on loans for personal and business needs, the loan business has become one of the most profitable sectors in finance.
Common Types of Loans in Finance Companies
Personal Loans
Personal loans are unsecured loans offered for weddings, travel, medical expenses, or personal use. They have higher interest rates (14–24%), which makes them very profitable for finance companies.
Business Loans
These are provided to small and medium businesses for expansion, working capital, or startup funding. They can be secured with property or unsecured, depending on the applicant’s credit profile.
Vehicle Loans
Finance companies offer loans for two-wheelers, cars, and commercial vehicles. The vehicle itself acts as collateral, making these loans less risky.
Gold Loans
In India, gold loans are highly popular. Customers pledge their gold ornaments in return for cash. If repayment is not made, the gold can be auctioned, which ensures safety and profit for the finance company.
Home Loans
Long-tenure loans given for purchasing or constructing houses. Though they have lower interest rates (8–12%), they provide stable long-term revenue.
Microfinance Loans
Small-ticket loans provided to farmers, traders, and low-income groups. Interest rates are higher but repayment risks are also high.
Education Loans
Offered to students for higher studies in India or abroad. They usually come with flexible repayment terms and government support.
Consumer Durable Loans
Short-term loans for products like mobiles, laptops, furniture, or home appliances. These are high-margin loans and very popular in urban markets.
How Finance Companies Make Profit
Interest Rate Margin
Finance companies borrow from banks at a lower interest rate and lend to customers at a higher rate. For example, they may borrow at 8% and lend at 18%, keeping the 10% margin as profit.
Processing Fees
Every loan includes a 1–3% processing fee, which is extra income for the company.
Penalties & Late Fees and Cross-Selling
If customers miss EMIs, finance companies charge heavy penalties