Loans serve a different purpose in people’s lives. Some of them help improve the CIBIL score, and some fulfill any sudden financial requirements. Loans fall into two categories namely secured or collateral loans and unsecured loans. Personal loans are the most common type of unsecured loans. Let’s discuss the difference between the two quickly.
A collateral loan demands your asset as a security against the amount you are borrowing from any lender. The asset can be your home, vehicle, assets such as land or commercial property, gold, or any financial assets that you own. Contrary to this, personal loans are unsecured loans where you need not provide any asset as a security against the amount you borrow.
What will you choose between the two? It depends on your financial background, credit history, eligibility criteria, and many such factors. In most cases, individuals tend to choose a personal loan over the secured loans. Here are the reasons that lead them to this choice:
- Possession of Assets
In order to avail a secured loan, it is very important that the primary applicant owns the pledged asset himself, as well as complete documentation to prove the same. If the asset is jointly owned, then the lender will ask for signed consent from all owners before considering the loan application. Alternately, if the asset is owned by an entity such as a business, all promoters/directors who are responsible for the business will need to consent.
Not everyone owns assets of that kind. For instance, a lot of people may have a home. However, if the home loan is not completely paid, it may not be possible to take a mortgage on it. Thus, in such cases, people choose to go for personal loans.
- The Requirement of Smaller Loan Amounts
When the loan amount required is small, there is no need to hand over any security to lenders as it is easy to repay the amount. So, people choose to go for minimal documentation and avail instant money through personal loans.
- A stable financial situation that guarantees comfortable repayment of personal loans
When people are financially stable, they are confident that they can repay the loan comfortably, they go for a personal loan. It is essential to check the EMI through a personal loan EMI calculator before making this decision. Sometimes the interest can exceed the loan amount if you choose a longer tenure for repayment.
Having a good CIBIL score can result in getting lower interest rates on loans even without security. Thus, an applicant can get personal loans at lower interest rates if he happens to have a decent credit history, and a high CIBIL score (755-800), apart from a stable income source, good employment history and complete documentation. Thus, people with high CIBIL scores do not need to hand over their assets to the lender against the loan. So, they opt for personal loans.
- Conditions on assets
In order to take a secured loan, lenders need assurance that the asset is of good quality. Thus, for instance, if Mr. A owns a house that is more than 5 years old or which is in serious need of repairs, he may not be able to use it for collateral on a loan even if he has complete ownership. The same applies to the quality of other collateral such as gold, land, or financial assets.
- The requirement of instant loans
When people are in immediate need of money and do not want to go through a long process which is usually the case while availing a collateral loan. Thus, they opt for personal loans.
- Payment of credit card bills or other loans
It is essential to pay credit card bills strictly within a month of getting the bill. Sometimes people may face financial scarcity and find it difficult to pay these bills. They choose to avail a personal loan rather than paying higher interest rates on unpaid credit card bills. Similarly, sometimes people take a personal loan to pay off a part of another loan they may be having.
- Financing a purchase
The purchases like electronic goods, vehicles, etc. need a considerably high amount of money at a given time. Paying this amount at one go becomes difficult. Thus, people opt for personal loans to avail money to pay for these purchases and then return it in the form of small payments made every month to the lender.
Final words
These are the reasons why people often choose a personal loan over a collateral loan. But it is essential to check the eligibility criteria, repayment capacity along with making the interest rate comparisons before choosing between the two. Your own requirement too plays the most important role here. If you need a small amount or a loan for personal reasons, then personal loans would be a better choice. On the other hand, if you need a very large amount with a longer tenure in order to manage the EMI for a reason that is important to you as well as your family/business partners, then a collateral loan would be the better choice.
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