Types of Loans and Advances
Each type of loan goes wrong in its own way. Know the type and you know what to ask.
Banks and NBFCs lend in many forms, and each form fails in its own way. A term loan goes overdue when an EMI is missed. A cash credit account goes wrong when the borrower stops putting money through it or runs above the limit. A bank guarantee becomes a loan only when it is invoked.
Knowing the type of loan on your list tells you what the borrower actually owes, how it was meant to be repaid and what questions to ask. The DRA syllabus groups these as types of loans and advances.
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Funded Facilities: Money Actually Lent
Demand loan
How it works
Repayable whenever the bank demands. No fixed schedule.
Example
A loan against a fixed deposit or gold
Term loan
How it works
Fixed amount, repaid over a set period, usually in EMIs.
Example
Home, vehicle, personal and business term loans
Cash credit (CC)
How it works
A running limit for working capital, usually against stock or receivables (book debts). The borrower draws and repays as business flows.
Example
A shopkeeper's limit against stock in hand
Overdraft (OD)
How it works
Permission to draw beyond the balance in a current or savings account, up to a limit.
Example
OD against salary or against a fixed deposit
Bills purchased / discounted
How it works
The bank pays the seller now against a bill of exchange and collects from the buyer later.
Example
A trader's sale bills discounted by the bank
| Type | How it works | Example |
|---|---|---|
| Demand loan | Repayable whenever the bank demands. No fixed schedule. | A loan against a fixed deposit or gold |
| Term loan | Fixed amount, repaid over a set period, usually in EMIs. | Home, vehicle, personal and business term loans |
| Cash credit (CC) | A running limit for working capital, usually against stock or receivables (book debts). The borrower draws and repays as business flows. | A shopkeeper's limit against stock in hand |
| Overdraft (OD) | Permission to draw beyond the balance in a current or savings account, up to a limit. | OD against salary or against a fixed deposit |
| Bills purchased / discounted | The bank pays the seller now against a bill of exchange and collects from the buyer later. | A trader's sale bills discounted by the bank |
Non-Funded Facilities: A Promise, Not Cash
No money leaves the bank at the start. The bank takes on a liability that turns into a loan only if something goes wrong.
- Bank guarantee (BG)
- The bank promises to pay a third party if its customer fails to perform or pay. If the guarantee is invoked, the bank pays and recovers from its customer.
- Letter of credit (LC)
- The bank promises to pay a seller once the seller submits the right documents. Used in trade. If the buyer does not fund it, the bank's payment becomes the buyer's debt.
Other Ways Loans Are Classified
- check_circleSecured vs unsecured: a secured loan is backed by an asset (house, vehicle, gold, stock). An unsecured loan, such as most personal loans and credit cards, rests only on the borrower's promise.
- check_circleRetail vs business: retail loans go to individuals (home, vehicle, personal, education, gold, credit card). Business loans go to firms and companies (working capital, term loans, MUDRA loans to micro units).
- check_circleShort, medium and long term: based on the repayment period, from working capital that renews every year to home loans running decades.
- check_circlePriority sector vs others: loans to agriculture, micro, small and medium enterprises, education, housing within limits and weaker sections, which RBI requires banks to support.
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What the Agent Should Ask, by Loan Type
Vehicle term loan
Typical problem
Two or three EMIs missed
Useful first question
Is the vehicle still with you and earning?
Personal loan or credit card
Typical problem
No security; borrower stops paying
Useful first question
What changed in your income?
Cash credit
Typical problem
Account stays at the limit with no credits
Useful first question
Is the business still running and selling?
Gold loan
Typical problem
Interest unpaid until maturity
Useful first question
Do you plan to renew or release the gold?
Kisan Credit Card (KCC)
Typical problem
Repayment linked to the harvest
Useful first question
When is the crop sold this season?
| Loan type | Typical problem | Useful first question |
|---|---|---|
| Vehicle term loan | Two or three EMIs missed | Is the vehicle still with you and earning? |
| Personal loan or credit card | No security; borrower stops paying | What changed in your income? |
| Cash credit | Account stays at the limit with no credits | Is the business still running and selling? |
| Gold loan | Interest unpaid until maturity | Do you plan to renew or release the gold? |
| Kisan Credit Card (KCC) | Repayment linked to the harvest | When is the crop sold this season? |
A Debit Card Is Not a Loan Card
RBI does not allow banks to issue debit cards on cash credit or loan accounts. The exceptions are the overdraft on a Pradhan Mantri Jan Dhan account and a Kisan Credit Card account, which may be linked to a debit card.
How the DRA Exam Tests This
Expect matching questions: "A loan repayable on demand is a ___ loan", "A bank guarantee is a ___ facility" (non-funded), "A running working-capital limit against stock is ___" (cash credit). The trap is mixing up cash credit with overdraft. Both are running limits, but cash credit is a working-capital facility against stock or receivables, while an overdraft runs on a current or savings account.
FAQs
What is the difference between a term loan and a demand loan?expand_more
A term loan is repaid over a fixed period, usually by EMIs. A demand loan has no fixed schedule; the bank can ask for full repayment at any time.
What is the difference between cash credit and overdraft?expand_more
Both let the borrower draw up to a limit. Cash credit is a working-capital limit for a business, usually against stock or receivables. An overdraft lets a customer draw beyond the balance in a current or savings account.
What are non-funded facilities?expand_more
Facilities where the bank does not pay out money at the start, such as bank guarantees and letters of credit. They become loans only if the bank has to pay.
Is a credit card a secured or unsecured loan?expand_more
Usually unsecured. The card issuer lends against the cardholder's repayment record and income, not an asset.
Next steps
- Principles of Lendingarrow_forward
- Securities & Chargesarrow_forward
- Priority Sector Lendingarrow_forward
- NPA Classificationarrow_forward
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