Mainly there are two types of personal loans, secured and unsecured. A secured personal loan requires collateral security may be in terms of immovable fixed assets or fixed deposits.
At times difficult financial situations may crop up without giving any warning in everyday life. This is where we might need money to overcome the situation. A personal loan helps ease our financial difficulties in a dignified manner. Many banks and private financial institutions offer personal loans depending upon the requirement and financial eligibility of the borrower. The repayment tenure varies from one year to five years as scheduled by the institutions. There are a lot of many types of personal loans, and understanding them can help the Borrower make the right choice for the loan.
Secured and Unsecured Personal Loans:
In contrast, there is an unsecured loan that does not require any immovable fixed assets or any fixed deposits.
Secured Personal Loan:
In the case of a secured personal loan, the Borrower has to authorize access to the savings account or obtain the loan with a valued asset. The lending institutions require access to the lien bank account through which the monthly installments will be remitted. Some institutions, at times, accept movable properties also as collateral, and loans secured with commercial vehicles are feasible. In case of any default, the institution can attach the asset.
The lending interest rates are lower because the risk factor is minimal, considering the secured assets. The loan amounts depend on the secured assets; in a way, it helps the Borrower to avail higher loan amount depending on the asset value.
The only demerit in this type of loan is the assets are attached in case of any default.
Unsecured Personal Loan:
Apart from requiring collateral securities, financial institutions provide unsecured loans depending on the borrower’s credit score to make a decision about how much a borrower can borrow and fix up lending rates. If a borrower has a proper credit score, he will end up with a lower lending rate of interest. But a borrower can still get an unsecured loan with a negative credit score, but he or she has to pay a much higher lending rate of interest to avoid the risk the institution takes on.
- Collateral security is not required, thereby decreasing the risk factor of the Borrower.
- The equated monthly installments are fixed so the Borrower knows in advance when the loan is getting over.
- If Borrower has a good credit score, many other facilities are awarded.
- The Borrower has no idea of his credibility and eligibility for borrowing.
- The lending interest rate may be higher in case of a bad credit score.
Different Personal Loans and Their Applications:
A personal loan can be utilized as per the choice and requirement of the Borrower. There are, in fact, different types of personal loans available because of borrowers’ needs like Holiday loans, Credit building loans, and Marriage loans, to name a few of loans. The Borrower has to decide consciously in a wise manner before opting for a loan.
Generally, holiday loans are unsecured. A borrower can avail of these loans to go on a holiday with family and enjoy the vacation. However, the reality is that Borrower has to repay this loan in months or even in a few years. Even as the good memories of the vacation fade away, the liability is still on. A wise solution to avoid a vacation loan is to plan and save up for your vacation. Calculate how much is required to save each month, and then the Borrower will not have to consider paying interest.
Credit Building Loans:
These loans are designed explicitly for Borrower to strengthen their credit score. It helps Borrower to consolidate their credit score. The score might be increased with a savings account or might even be secured through a short-term loan. When the Borrower makes on-time payments, the borrower’s credit score improves, Hence growing the chance of opening you up to other financial opportunities and borrowings.
Holiday loan Marriage loan is also unsecured and meant for a particular purpose. Marriages are quite expensive nowadays and coughing out the cash for a wedding is quite tough. A targeted personal loan can ease the purpose, especially if Borrower has a good credit score and can also enjoy a low-interest rate. The Borrower can quickly reduce the amount of borrowing by modifying expensive plans or by reducing unwanted expenses as much as possible and only borrowing the desired amount.
A personal loan can help Borrower get the money considering the exact nature of the requirement. However, anytime a borrower takes credit, he or she should be cautious. Unnecessary borrowing should not happen because it has to be repaid back to the institution from where the personal loan has been availed with interest and within a fixed stipulated time.