To meet an emergency or a planned expense, at some time or the other, one wants to take a loan.
However, Gaurav Jalan, CEO and Founder, mPokket, says, “It’s essential to know about the diverse loan types before opting for a loan, especially their pros and cons.”
Broadly, loans are either secured or unsecured. Secured loans are the ones exactly where the borrower pledges some sort of collateral, be it a house, jewellery, land or a car, and so forth. one thing roughly equivalent in worth to the loan quantity.
The other category, unsecured loans, comes with out any collateral. Jalan says, “As lenders take the highest risk in advancing these loans, the loan amounts are much smaller along with higher interest rates.”
Secured Loans
Due to the collateral offered with this loan, lenders are at minimal threat. In case of default or non-payment by the borrower, lenders can just seize the asset to recover their dues.
Though secured loans have tougher eligibility norms than unsecured ones, Jalan says “these are more preferable as they allow high borrowing limits, longer repayment tenures and low-interest rates. Nonetheless, borrowers should avoid secured loans if unsure about their repayment capacity in the long run because, besides collateral being seized, their credit score will be negatively impacted.”
Home loans are one of the most well-liked secured loans typically availed from banks, exactly where the new home bought serves as the collateral. Usually, secured loans involve home, gold and vehicle loans as properly as loans against house.
Gold loans are also opted by people today in urgent will need of revenue, exactly where the gold is pledged as collateral and the lender gives about 75 per cent of its worth as a loan.
A loan against house includes mortgaging one’s residential or industrial house as collateral. With vehicle loans, the car acts as collateral. Due to collaterals, such loans are typically procured at somewhat low-interest prices.
Unsecured Loans
Considering the higher threat attached with these varieties of loans, they come with larger interest prices than secured ones, mainly because of which the loan amounts are also typically significantly smaller sized.
Industry authorities say an unsecured loan should really only be thought of if the borrower can make the repayments on time.
Jalan adds, “Making repayments on time helps improve a borrower’s credit score. Usually, such loans don’t have complex terms and conditions but are advanced with relatively simple criteria. In case of non-payment, there are no assets to seize as nothing is pledged.”
However, borrowers should really keep away from such conditions as their credit score will be broken, hindering their probabilities of procuring loans in the future.
One of the significant added benefits of unsecured loans is the borrower can use them for any goal. Having stated that, interest prices on these loans are higher, with quick repayment schedules. Some well-liked unsecured loans involve credit cards, private lines of credit, private loans, and so forth.
Jalan adds “Credit cards constitute one of the oldest types of unsecured loans. Here, the billing happens once a month with interest charged only on any outstanding balance.” The interest price of credit cards ranges involving 38-45 per cent per annum.
Similar to a credit card, the private line of credit comes with a pre-authorized credit limit, which can be made use of in any way necessary.
Finally, private loans can be utilised in several approaches – be it to spend bills, meet healthcare exigencies or for travel and research. Based on a borrower’s credit history, the loan quantity can differ from a couple of thousand to lakhs.
Jalan adds, “With the difference between secured and unsecured loans clarified, readers can choose the type best suited for their wallets and wants.”