Secured and Unsecured Personal Loans

Personal loans are one of the most sought-after financial instruments in India in that millions of Indians take personal loans for a variety of reasons ranging from tuition fees and vacationing or traveling abroad to buying home appliances and weddings. All banks offer in India offer personal loans at competitive interest rates while some offer additional benefits to their privileged customers. However, consumers must be aware of not only the different uses of personal loans but also the different types of personal loans to choose the one which is most suitable to their financial requirements.

In several cases, customers can get their loan sanctioned in a couple of days, provided all the eligibility criteria are met. Bank representatives will procure all the required documents from customers, initiate and complete formalities to pave way for loan disbursal. Personal loans are offered from Rs. 50,000 to Rs. 15 lakhs and above depending upon the income profile, age and repayment capacity of the borrower. If a customer chooses to take a loan jointly with his or her spouse, it may increase their eligibility to take a higher loan amount.

Personal loan interest rates depend on various factors. Income, employment history and credit score are some of the factors considered. The following are the interest rates being offered as on October 7, 2015.

➢     CitiBank - 13.50% to 15.35%

➢     ICICI Bank - 12.49% to 19.50%

➢      Kotak Mahindra - 12.99% to 17.50%

➢     HDFC Bank - 11.99% to 20%

There are two types of personal loans, namely secured and unsecured. Both secured and unsecured personal loans have their own set of advantages and disadvantages. Customers must analyse the merits and drawbacks of understand which type of loan is more convenient for them.

Secured Loans

If customers choose to take secured loans, they have to provide any collateral or asset as security to the bank. Stocks, bonds, or even personal property can be provided as security for a loan. In some cases, the purchased item such as car may be used as a collateral in that a lien is placed on it. The bank will, therefore, hold the deed pending the full payment of the loan along with interest and any additional fees. Given that secured loans are offered only after a customer offers a collateral, banks can offer large loan amount. Banks will not be reluctant to lend a larger sum of money if customers put their personal property as collateral. Secured loans, are therefore, and considered less likely to default. Also, secured loans are offered at lower rates of interest and longer duration of repayment compared to unsecured loans. If customers do not repay a secured loan, banks are within their rights to take ownership of the collateral the former pledged. In many cases, to recover the loan amount, banks may sell off the collateral offered by the customers.

Unsecured Loans

Unsecured loans, typically, do not require any collateral or security. In many cases, education loans and signature loans are offered without demanding any collateral. Banks consider unsecured loans to be riskier given that no property can be recovered in the event of a default. Also, the interest rates offered for unsecured loans are higher compared to secured loans. The repayment capacity and employment profile are of paramount importance when it comes to unsecured loans in addition to the ‘creditworthiness’ of a customer. A low cibil score may result in refusal of an unsecured loan in most cases. Banks have to therefore carefully analyse the credit behavior of a customer before deciding to approve a loan request. According to experts, unsecured personal loans are more suitable for customers who are in urgent need of financial assistance. The process of approval of unsecured personal loans is faster compared to secured personal loans given that the former does not entail any appraisal of a collateral.