Understanding the Role of Loan Collateral in Personal Loans

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Personal loans are one of the most flexible loans available in the Indian financing market. They are available as both secured and unsecured loans. This means you can avail these quick loans without submitting any collateral or you may submit collateral against the loan amount. 

Basically, collateral means an asset of value that you pledge to the lender as a guarantee of repayment. In case you fail to repay the loan as per the agreed terms, the lender has the right to auction the collateral and make up for the loan. This collateral can be your property, jewellery, vehicle or any other asset.

Most borrowers, who avail personal loans through the best loan apps, go for unsecured quick loans. This is because the loan processed is fastened because of the less paperwork involved, they do not have to put their assets at risk or they may not have an asset to pledge. However, going for a secured personal loan can be a smarter move if you have a solid repayment plan.

Read on to understand the role of loan collateral in personal loans.

Types of personal loan

Is collateral necessary for availing a personal loan? No. But can you pledge your collateral to avail a personal loan? Yes!

Personal loans are basically of two types – 

  • Secured personal loans

A secured personal loan is a financing option in which you can avail yourself of a collateral loan against a personal asset pledged as security. Most of the loan aspects of this advance are similar to any standard personal loan with the exception that it involves providing an asset as collateral.

  • Unsecured personal loans

Unsecured personal loans are advances that do not involve asset collateral. The loan availability is based on the financial and credit profile of the borrowing individual. An unsecured personal loan is often considered a standard personal loan. It is also referred to as a quick loan.

Only in cases where the borrower seeks a high financing value with upgraded terms of service, they opt for personal loans that are collateral-based. Also in case, if your credit score is poor or you do not qualify for a personal loan, you can opt for a secured personal loan by pledging collateral.

The Role of Collateral in Personal Loans

  • Availability of financing

The total loan limit available as secured personal loans is usually higher than that for unsecured personal loans. However, the total loan value is dependent on the value of the asset provided as collateral. Contrarily, an unsecured personal loan is approved based on your financial standing only and can be easily negotiated for if you have an impressive credit history and financial discipline followed.

  • Interest rate applicable

Interest rates on unsecured personal loans are set a notch higher than those for secured personal loans to accommodate the inherent financing risk. When availing a secured quick loan, you can negotiate with your lender for lower rates. Since the lender’s risk associated with your loan account is reduced; they may be open to offering you a loan at better interest rates.

  • Eligibility criteria involved

The eligibility requirements for an unsecured personal loan are simplified today and minimal, allowing easy access to financing for borrowers across income segments. However, an individual can avail a secured personal loan only if they own an asset with a high current market value. Also, the time taken to approve a secured personal loan is much less than a secured personal loan. This is because the lender might take more time to verify the papers related to your collateral.

  • Tenure available

The tenures for unsecured personal loans usually range from 12 months to 60 months. But if you opt for a secured loan you might get a longer loan tenure based on the loan amount and the value of your asset. However, do remember the shorter your loan tenure is, the better it is for you. 

  • Consequence of non-repayment of the loan

In case a borrower fails to repay their loan in part or in full, unsecured personal loan providers can notify the credit bureau of such inability and request for repayment completion for loan recovery. In the case of secured personal loans, the asset is subjected to the risk of an auction for recovery of the loan liability amount the borrower defaults on. 

Conclusion

In conclusion, unsecured personal loans are more popular financing options among borrowers. Most people opt for quick loans through the best loan apps as they are easy to avail and simple to repay. However, in case you want a higher loan value, do not meet the loan eligibility criteria or have a low credit score, then you can go for a secured personal loan. In addition to this, many people also go for collateral-based personal loans because of the low-interest rates offered on secured personal loans.

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