Personal Loan vs Loan Against Securities: How to Determine the Right Option

Understanding Personal Loans

When you’re in a situation where you could use a little extra money, breaking into your savings may not be the best option. And while you can always get financial support from your family, there’s a better solution that won’t let money come in between you and your loved ones. 

Personal loans. This simple financial instrument has become a bridge to the instant money needs of millions of Indians.

A personal loan is the money you borrow from any bank or NBFC to cover your financial requirements. Usually, these loans are collateral-free loans. This means you don’t need to provide any assets against the money you borrow.   

Whether an emergency comes out of nowhere or your family plans a last-minute vacation, you will never catch yourself wishing you had instant access to money.

What is Loan Against Securities? 

Loan against securities meaning is personal loan where you need to provide assets like gold, jewellery, shares, insurance policies, mutual funds, etc. against the money you borrow.

One of the biggest advantages of choosing this loan is that the interest charged is comparatively lower. But that’s not all. You also get to repay your loan with a longer personal loan repayment tenure. This is because the provided asset reduces the risk associated with lending the money.

The security you need to provide against the money you borrow can be different for different lenders.

While both personal loans and loans against securities can help you meet your financial requirements, they have different functionalities and serve different purposes. Understanding this difference can help you choose a better loan option.  

Key Differences Between Personal Loans and Loans Against Securities

Eligibility Criteria for Personal Loans and Loans Against Securities

Whether you’re apply for a personal loan or a loan against securities, you need to meet your lender’s eligibility criteria to get approved for a loan.  

While different lenders have a different eligibility criterion, these are some common requirements of a lender.

Interest Rates and Fees Comparison

When you take a loan from any financial institution, you need to pay it back with interest.

The interest you’re charged on your loans depends on various factors like your credit score, repayment history, monthly income, etc.

And while different lenders charge different interest rates on loans, there’s a significant difference between personal loans and loan against securities.

Loan Amount and Repayment Terms 

What’s more important than getting a loan approval is whether the loan amount meets your requirements and that you’re able to pay it back comfortably.

Here’s why it can be a deciding factor between secured and unsecured loans:

Purpose and Flexibility Considerations

Another very important factor to consider when choosing between a personal loan and loan against securities is the flexibility of usage.

Usually, personal loans are unsecured loans. This means you don’t have to provide any asset against the money you borrow. Because of this, you don’t have any restrictions on the end use of it. You can use the money anywhere you like, no questions asked!

On the other hand, when taking a loan against security, the lender can inquire about the purpose of the loan during the application process.

Risks and Collateral Requirements 

Secured and Unsecured personal loans carry a very different level of risk for both – the lenders and borrowers.

In a secured loan, the lender carries a lower risk as compared to an unsecured personal loan. This is because the borrower needs to provide collateral against the loan amount. On the other hand, the borrower is at risk of losing their collateral in the case of non-repayment.

In unsecured loans, there’s no requirement for any kind of collateral. Lenders provide a loan solely based on the credit profile of the borrower. Because of this there’s a higher interest charged on the loans.

Application and Disbursement Process Comparison 

Conclusion

Whether you need urgent cash during an emergency or are specifically looking for a two-wheeler, loans have made every financial requirement achievable.

While you may not have to pay a high interest on loan against security, an unsecured loan comes with no restrictions and faster processing.

Having a clear understanding of such different kinds of loans available in the market can help you choose the right lender and make more sound financial decisions.