Secured vs Unsecured Loan: Which is Better?

No matter how well you plan and set aside savings for a rainy day, there may be times when an unforeseen situation arises that forces you to consider applying for a loan to cover the costs. However, considering your loan choice is just as important as securing the necessary funds. A loan can have a lasting impact on your finances and should bode well for your financial ambitions and goals. It pays to rush to the first loan offer you receive, especially if your needs are pressing, but borrowers should be careful about the type of loan they choose.

If you need funds to meet personal expenses, such as the cost of business expansion, study abroad, weddings, or even emergency medical treatment, you may find that personal loans are the obvious choice. However, a personal loan is not the only option you have that secures funds with no end-use restrictions. People who need urgent financing should also consider a property loan – a guaranteed sanction without limitation of use of the amount of the loan.

What is a home loan?

A property loan is a sanctioned mortgage loan on a property used as collateral. Since the sum is granted to the borrower against collateral, the loan is considered secured and opens the doors to more competitive and attractive loan terms.

Borrowers can benefit from the significant penalty offered by the loan, ranging up to 5 crores, or even more, depending on their eligibility and need, at reasonable interest rates, usually starting at 8.60% per annum. Moreover, the repayment tenure of these loans tends to be long which gives you enough time to repay the loan amount at a comfortable pace. The most compelling advantage of a property loan is that there are no end use restrictions on the principal amount, allowing you to use the large funds for whatever reason you see fit.

The home loan application process has evolved and can be completed in minutes – almost entirely online. The applicant may be required to visit the branch just to submit the documents and sign the paper, and even that can be avoided if they use the door-to-door document collection services that most lenders offer today.

What is a personal loan?

Personal loans enjoy immense popularity both with the public and in the loan markets. However, its benefits are severely limited compared to a home loan. Personal loans are unsecured loans offered for a range of expenses, but at high interest rates. Borrowers also get a smaller loan amount which can limit their spending for urgent needs. Even the repayment term of a personal loan is relatively shorter, ranging from 11 to 12 months to a few years. This can make the repayment process difficult for borrowers who need more time to breathe.

Loan vs. Property vs. Personal Loan: Differences

Aspiring borrowers who are still unsure which loan to choose can browse through this list of differences to make an informed choice.

  1. Interest rate

A home loan is bound to secure more competitive interest rates considering its secured nature. The lender has the security of the collateral, which reduces the risk involved, as the sum can be recovered through the sale of the property – should the need arise.

A personal loan, on the other hand, is more expensive, as it is an unsecured loan granted at higher interest rates. Typically, lenders offer personal loans starting at 11-12%, which is higher than a loan against property.

  1. Amount of the loan

A home loan offers more in terms of financing than a personal loan. The maximum a borrower can generally obtain from a personal loan is 20 Lakhs, while a loan against a home borrower can enjoy significant penalties worth 5 Crore, or more, which is useful if large expenses are waiting to be covered.

  1. Repayment period

A property loan is especially advantageous for those whose repayment capacity can only accommodate reasonable and affordable EMIs. Repaying a personal loan can get expensive given the high interest rate and short repayment term, which often makes EMIs bigger than most can.

  1. Loan disbursement

The application process and disbursement of funds for a property loan can take up to 3 days if all goes well. A personal loan can be sanctioned almost immediately and performs better in this regard. Lenders take the time to verify the loan against the property documents that applicants submit and disburse the amount based on the eligibility and financial profile of the applicant. Personal loan applicants are not subject to such checks, as the loan is unsecured and disbursed on less lenient terms.

Final Thoughts

Applicants who need significant funding urgently should consider a property loan instead of a personal loan – just because of what they can save. In all aspects, the secured loan outperforms its unsecured counterpart and is more sensitive to the costs of individual finances. Even when you are in dire need of funds, the long-term impacts of a loan are essential things to consider.

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