Planning to purchase a car, house, fund your dream wedding or need funds to meet any other financial requirement? Wondering which type of loan you should take and which loan type offers the lowest interest rate. Read on to get answers to many such questions and choose the best loan option for yourself:
Secured V/s Unsecured Loans
Depending on whether they require collateral, loans are classified into secured loans and unsecured loans:
Secured Loans: These are secured against collateral or security. Since these are backed up by collateral which can be repossessed in case you fail to repay the loan as agreed, they decrease the risk for the lender. Thus, secured loans can also be availed by individuals with poor or no credit history. The secured nature of the loan also leads to lower interest rates, higher loan amounts and longer repayment tenure. Some common secured loans include:
- Home Loan: Home loans can be availed to purchase a house, for home improvement or extension. They come with a repayment tenure ranging up to 30 years and offer loan amounts up to 75% to 90% of the value of the property. They are offered at lower rates of interest often starting as low as 7% to 8% p.a.
- Auto Loan: An auto loan can be availed to purchase a new or pre-owned car or two-wheeler, where the vehicle itself is used as collateral. Lenders usually offer auto loans up to 90% of the cost in case of new vehicles and 85% for pre-owned vehicles. These are offered at lower rates of interest and come with a repayment tenure ranging between 12 to 84 months.
Unsecured Loans: These include personal loans, pre-approved loans, etc. which are not backed up by collateral or security and thus involve a higher degree of risk for the lender. They are granted primarily on the basis of an individual’s credit history and income. Unsecured loans generally come with higher rates of interest, shorter repayment tenure and smaller loan amounts. Some popular unsecured loans that you can avail to meet your financial needs are:
- Personal Loan: Zero collateral requirement, flexible end-usage and minimal paperwork make personal loans one of the most popular unsecured loans. These are offered for loan amounts generally ranging up to Rs. 50 lakh and flexible repayment tenure ranging between 12 to 60 months. However, the unsecured nature of these loans increases the risk for the lender and results in relatively higher rates of interest as compared to those offered on secured loans.
- Credit Cards: Credit cards are special credit instruments that provide a revolving form of credit, that is, these offer repeated access to funds. They offer a credit limit depending on your financial standing up to which you can spend, repay and spend again. These usually come with double digit interest rates, which are often higher than those offered on personal loans. However, they are good for short-term financing and purchases as they often offer additional rewards and benefits, are easier to apply and qualify for and interest is charged only on the funds that are used.
- Pre-approved Loans: These are special loans that banks offer from time to time to eligible customers. These are a type of personal loans with a difference that these are already pre-approved and the borrower gets a personalized interest rate on the loan.
The Final Word
The collateralized nature of secured loans usually results in some of the lowest interest rates being offered on these loans. However, they come with the risk of your asset being repossessed by the lender in case you fail to pay off the loan. While these loans can also be availed by individuals with poor credit history, these loans are usually offered for fixed end usage such as a home loan can be availed only to purchase a house/ home improvement and cannot be used for anything else.
On the other hand, unsecured loans such as personal loans and credit cards are usually offered at relatively higher rates of interest, you may be able to avail a reasonable rate of interest if you have a good credit history, income and stable employment history. They also come with the added advantage of flexible end usage and can be availed to meet any personal financial need including medical expenses, home renovation, vacation, debt consolidation, etc.
Thus, secured loans are offered at lower rates of interest than most unsecured loans, it is advisable to choose a loan as per your unique requirement and financial standing. An auto loan is more suitable than a personal loan if you wish to purchase a car. Also, those with a poor credit history or looking to rebuild credit should opt for and can more easily avail a secured loan. Also, some loans are by nature secured and the choice isn’t really yours to make whereas personal loans offered at relatively higher rates of interest are ideal in case you don’t wish to undertake the risk of asset repossession in case you fail to repay the loan or require flexibility in fund usage. They can also be availed on reasonable rates of interest if you have a good credit history and stable income.