Broadly speaking, there are two major classes of loans: collateral-based or secured and collateral-free or unsecured. Both types have their share of merits and demerits. For example, if you are seeking substantial finances to fund a big project, you can consider a secured loan against property. On the other hand, if you don’t want the hassle of identifying a high-value asset or a very heavy loan amount, you can get an online personal loan. A personal loan is unsecured by nature. If you are wondering whether a personal loan is an unsecured loan, you are right. A personal loan is one of the prime examples of a collateral-free loan.
Before diving into the options available to you in these two classes, you should know which one is better for you. Here are five points you should consider when weighing a secured loan against an unsecured loan.
Basics of secured and unsecured loans
The main factor that sets secured and unsecured loans apart is the necessity of pledging any asset as collateral. While unsecured loans are collateral-free, secured variants require your loan to be backed up by an asset like a house, vehicle or even gold.
So, a loan against property is obtained by pledging a residential or commercial space as collateral, an auto loan is obtained by pledging a car, and a gold loan is obtained by pledging gold items like jewelry.
Unsecured loans save you the hassle of identifying an asset. Examples of unsecured loans are personal loans and business loans. The absence of collateral is one of the top reasons that make unsecured loans like personal loans popular.
The interest rate you obtain from your lender
In terms of rates of interest, secured loans tend to be more economical. The presence of security gives the lender leeway to recover finances in case you default on loan payments. Unsecured loans do not have this feature and hence lenders tend to attach higher interest rates in order to compensate for any potential default. That being said, there are smart ways that you can use to make your interest rates affordable. These include improving your credit score, keeping your debt-to-income ratio low, and choosing the right lender.
How the loan-to-value ratio affect the principal amount you obtain
If you opt for a secured loan, then one of the terms that you will have to know about is the loan-to-value ratio. This ratio determines the loan amount you will obtain. Basically, lenders will offer you financing up to a percentage of the market value of your pledged asset. So, assuming a loan-to-value ratio of 75%, you will get a loan of up to Rs.7.5 lakh against gold worth Rs.10 lakh, and a loan of worth Rs.75 lakh on a property worth Rs.1 crore.
The importance of your CIBIL score when applying for a loan
A good CIBIL score is important when you avail both a secured and unsecured loan. While you can get a sanction on both loans with a low credit score, a high score is more necessary with an unsecured loan, as this is the only way for the lender to gauge your trustworthiness as a borrower.
Your CIBIL score is a 3-digit number generally ranging from 300 to 900. It gives the lender a picture of your creditworthiness and tells them how you have handled debt in the past. So, a high CIBIL score translates into a higher loan amount at lower interest rates. Aim for a score of at least 750, as most lenders will be comfortable offering you a loan at favorable terms with this score.
While this refers to the application, even repayment of these loans affects your credit score.
If you were thinking whether an unsecured loan affects your credit score, the answer is yes. When you pay your EMIs on time, your credit score increases. Find out more about this next.
What happens in case you default on loan payments?
For both secured and unsecured loans, defaulting is a serious matter. In the case of a secured loan you can lose possession of your asset and in case of an unsecured loan, legal action can be initiated. Apart from this, missing out on EMI payments on either loan type adversely impacts your credit score negatively. Additionally, late payments involve extra fees. However, in case you are in a financial crunch, you can consider negotiating with your lender the possibility of increasing the tenor.
If an unsecured loan appears more attractive for you, consider opting for Bajaj Finserv Personal Loan. This loan gives you finances up to Rs.25 lakh at economical interest rates for tenors spanning from 12 to 60 months. One of the top features you can get here is the Flexi loan facility. It allows you to borrow money from your sanction on the go, pays interest only on the amounts withdrawn, makes prepayments at zero extra fees, and even redraw the repaid amount from your sanction without making fresh loan applications!
In terms of repayment, you can either pay regular EMIs or pay interest-only EMIs with the balance cleared at the end of the tenor via the Flexi loan facility. If you are wondering how to calculate personal loan EMIs for each case, then all you need to do is enter the right numbers in the personal loan calculator. using this online calculator you can know your loan monthly EMI, or manage your personal loan easily in your budget.
Bajaj Finserv keeps the eligibility criteria for its personal loan simple and you can even apply for your Online personal loan. Upon approval, the money is disbursed to your bank account in 24 hours. However, the best way to make the process quicker is to check your pre-approved personal loan offer as doing so gives you instant approval and access to custom deals.