It’s essential to know about the diverse loan types before opting for a loan, especially their pros and cons.
To meet an emergency or a planned expense, at some time or the other, one needs 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 where the borrower pledges some kind of collateral, be it a property, jewellery, land or a vehicle, etc. something roughly equivalent in value to the loan amount.
The other category, unsecured loans, comes without 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.”
Due to the collateral provided with this loan, lenders are at minimal risk. In case of default or non-payment by the borrower, lenders can simply 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 popular secured loans generally availed from banks, where the new home purchased serves as the collateral. Usually, secured loans include home, gold and car loans as well as loans against property.
Gold loans are also opted by people in urgent need of money, where the gold is pledged as collateral and the lender provides around 75 per cent of its value as a loan.
A loan against property involves mortgaging one’s residential or commercial property as collateral. With car loans, the vehicle acts as collateral. Due to collaterals, such loans are usually procured at relatively low-interest rates.
Considering the greater risk attached with these types of loans, they come with higher interest rates than secured ones, because of which the loan amounts are also usually much smaller.
Industry experts say an unsecured loan should only be considered 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 avoid such situations as their credit score will be damaged, hindering their chances of procuring loans in the future.
One of the major benefits of unsecured loans is the borrower can use them for any purpose. Having said that, interest rates on these loans are high, with short repayment schedules. Some popular unsecured loans include credit cards, personal lines of credit, personal loans, etc.
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 rate of credit cards ranges between 38-45 per cent per annum.
Similar to a credit card, the personal line of credit comes with a pre-approved credit limit, which can be used in any way required.
Finally, personal loans can be utilised in various ways – be it to pay bills, meet medical exigencies or for travel and studies. Based on a borrower’s credit history, the loan amount can vary from a few 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.”