Personal loan: How is this different from a secured loan? An explainer | Mint

A personal loan is quite different from other variants of loans. Unlike other loans such as a house loan or a car loan, a personal loan is an unsecured loan. Rate of interest charged on personal loan is usually higher than that of other loans and it does not require a collateral from the borrower.

Key characteristics of personal loan

I. No collateral required: Typically, lenders (which could be banks or non banking financial corporations) require collateral before they grant loan to an applicant. However, banks do not require collateral in case of personal loans which are unsecured and free of security.

II. Rate of interest: Another key characteristic is that these loans have a higher rate of interest (10-24 percent) unlike secured loans which have a lower interest (8-10 percent per annum).

Before opting for unsecured loan, you need to take following precautions:

I. Exorbitant interest rate: By virtue of an unsecured loan, personal loans carry a higher rate of interest. But you need to make sure that the interest rate charged on loan is not exorbitant and is within the acceptable range which prevails in the market.

II. Aligning with credit score: An unsecured loan is given in alignment with credit score. If it is high, borrowers can secure a loan at a low rate of interest and if the credit score is low, rate of interest can be high.

Therefore, if you have a good credit score, it is recommended to look for a better deal in terms of lower rate of interest.

III. Hidden charges: Importantly, you should make sure that the loan agreement does not have any hidden charges.

IV. Bank Vs NBFC: An unsecured loan is given by both banks and NBFC. Usually banks charge a lower rate of interest than an NBFC.

V. Pre-approved loans: At times, banks give pre-approved loans to borrowers. Therefore, before you opt for a regular personal loan – you could explore the option of pre-approved loan. This can be a go-to option when you need the loan urgently and instantly.

(Note: Raising a loan comes with its own risks. So, due caution is advised)