Borrowing a loan to meet a need is a practical solution to your financial problems, whether to buy a house with a secured loan or to meet a medical emergency with an unsecured personal loan. But how do you know which one to choose? Read on to know more.
What differentiates the two types of loans?
There are differences between secured and unsecured loans. We list them, in no particular order:
* Tenures. Secured loans normally have long tenures, ranging from 5 to 20 years in case of home loans. Vehicle loans and home renovation loans may have tenures from 3 to 7 years, depending on the lending institution. In contrast, an unsecured personal loan may have shorter tenures, from six months to 540 days when you take the loan from the best loan app in India.
* Documents required. Since secured loans require collateral (in the form of a house and sale agreement for home loans, for example) and the loan amount is much larger, there is a longer list of documents to be submitted for this loan category. The lending institution requires documents like ITR for three years, bank statements showing income credit for at least six months, papers for the security you furnish, income statements and certificate from place of work, etc. Meanwhile, unsecured loans do not require a long list of documents for approval: submit proofs for income, residence, and photo ID, along with a bank statement for two months.
* Approval and disbursal times. Secured loans normally take about two weeks for loans like vehicle loans, and one month to six weeks for approval of home loans. This is because the lender must check the physical asset, its paperwork, your credentials and ITR, etc. Apart from one team that checks your personal credentials, a legal team is tasked with checking the asset’s paperwork. You do not see long wait times with personal loans, since the lender does not ask for any collateral. The lender is more concerned with your credit score and repayment ability than other factors, so approval and disbursal times are quite low.
* Interest rates. Unsecured loans typically have higher interest rates than secured loans. The best loan apps in India offer 2.75% interest rate on the entire loan amount per month. Meanwhile, other lenders may have a higher rate of interest on the same loan. However, leading loan apps encourage repeat loan applications by offering lower rates of interest to past customers under their membership loyalty programmes.
* Loan amounts. The personal loan will typically not fetch over Rs 4,00,000 based on your eligibility. However, secured loans like home purchase loans may be as high as Rs 1 crore, based on the applicant’s income, the property under question, credit score and other factors.
There are glaring differences between unsecured and secured loans, as enumerated in the points above. Once you know these differences, it is easier to choose the right loan product for your needs.