What Are The Two Types Of Bank Loans In India?
When you think about taking a bank loan, there are two broad options you have:
- Secured loans or loans with collateral
- Unsecured loans or loans without collateral
A secured loan is one where the borrower has to offer a financial asset to the bank as security. You can pledge land, a house, gold, FD, vehicle and more to get the loan. Car loans and home loans are examples of loans with collateral.
An unsecured loan is one where the borrower doesn’t need to pledge any asset to the bank. The loan is given based on the credit history of the person. Some examples of unsecured loans are personal loans and credit cards.
What Are The Features Of An Unsecured Loan?
Majority of unsecured loans are personal loans. While you do not need to promise an asset to the bank as security against defaulting on repayment, the bank does conduct a thorough background check. They will look into your credit history to see if you have defaulted or delayed payment on other loans before and they will evaluate your financial health. The application for a loan without collateral is only approved after this check.
- Interest rate
Unlike secured loans, personal loans have a very high-interest rate. The rate can even go as high as 30% based on how strong your credit history has been till date. In some cases, the interest can be even higher.
There are three main eligibility criteria for personal or unsecured loans:
- An excellent net income – the person can be salaried or self-employed.
- Between the age of 21 to 65.
- A solid credit score and history.
- Loan amount:
The total personal loan amount can range from a few thousand to a few lakhs. The final quantum depends upon several factors such as:
- employer profile
- credit history
- lender’s lending policies
For What Can Use Personal Loans?
Unlike secured loans which have a fixed end-use, like a car loan can only be used to buy a vehicle; personal loans are open to any purpose. You can use the money for anything ranging from buying electronics for the house to home renovation, from purchasing furniture to funding a vacation. It can also be used for the following:
- fund your or your children’s education
- fund a marriage
- become working capital for a business
- get financial aid for a medical emergency
Since there are a fewer number of documents required for an unsecured loan, the processing time is much shorter. In a few cases, the loan is approved almost instantaneously. A drawback of personal loans is short tenure. They have a flexible repayment schedule that has to be completed within 1 to 5 years.
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