Loan products are of different types. They serve varied different purposes in people’s lives. While some loan products can help you improve your CIBIL score, other loan options can fulfil your emergency financial requirements. 

Loan types fall into two main categories:

  • Collateral or secured loans: To avail of collateral loans, you need to pledge a security or collateral. That is why they are also called secured loans, as lenders take your security. The interest rate of collateral loans is lower than that of unsecured loans.
  • Unsecured loans: Unsecured loans are loans that lenders offer without the need for any collateral or security. Many of the best instant loan apps in India offer instant personal loans. As the loans are unsecured, their interest rate is higher than secured loans.

Personal loans offered by personal loan apps are the most typical type of unsecured loans. Let us see the difference between collateral and personal loans here:

Personal loans vs collateral loans

You have to pledge a security or guarantor to avail of collateral loans. The secured loan demands some type of security against the loan amount that you are borrowing from your lender. The security can be anything like your home, land, commercial property, etc., for big loans or your vehicle, gold, or any financial asset you own for a loan of a small amount. 

Alternatively, when you take unsecured loans like the ones from personal loan apps, you need not provide any security against the loan amount you borrow.

So, what loan option is better between the two? Well, it depends on your required loan amount, credit history, financial background, eligibility criteria, etc. factors. However, mostly, borrowers opt for a personal loan from some of the best instant loan apps in India over secured or collateral loans. 

The reasons why you should choose personal loans over collateral loans

Below are the reasons why you should choose a personal loan over collateral loans:

Reason #1—Instant availability of personal loans

When you are in immediate need of money because of some medical emergency, it does not make sense to go through a long process of availing a secured or collateral loan. And so, in emergencies, opting for personal loans is your best option. With some of the best instant loan apps in India available today, you can get personal loans as quickly as on the same day.

Reason #2—Need for smaller loan amounts

You may not need large loan amounts. Instead, at times, you just require small loans. And personal loan apps can offer you easy small loans. With collateral loans, the loan amount is generally big, and as you need to hand over security to your lender, the loan process gets longer and arduous. Instead, with personal loans, it is easy to avail and repay small loan amounts. So, if you want minimal documentation and quick money, go for personal loan apps.

Your stable financial situation can guarantee the comfortable repayment of your personal loan. When you are financially sound and confident of repaying the loan comfortably, you must go for a personal loan. You can also check your loan EMI using an EMI calculator before making a decision. Beware as sometimes, with choosing longer repayment tenures, the loan’s interest can exceed even the principal loan amount.

A good CIBIL score can help you avail of a personal loan and get it at a lower interest rate without pledging any security. You can avail of personal loans at lower interest rates with good employment history, a decent credit history, and a stable income. So, when you have a high CIBIL score, and need smaller loan amounts, it does not make sense to hand over your assets to avail of a loan. Instead, you can opt for quick personal loans from personal loan apps

Reason #3—No condition on end-usage of the loan amount

You can use your loan amount anywhere you want. There is no restriction on the end-usage of your personal loan amount. 

Alternatively, when you take a secured loan, there are many restrictions and criteria. You may not use a secured loan taken to pay for medical expenses in some other way, or you need to assure the lender that your asset is of good quality to avail of a loan. 

For example, if you want to avail a loan against property, and if your house is more than ten years old or in serious need of repairs, your lender may not take your house as collateral even if you have complete ownership of your home. The same applies to the quality of other collaterals like land, gold, or financial assets.

Reason #4—No need to possess any assets

To avail of a secured loan, as a primary applicant, you must own the pledged asset yourself, as well as submit documentation to prove the same. Again, if the asset in question is jointly owned, the lender would ask for signed consent from all the asset owners before considering it for loan application. Moreover, if the asset is owned by a business entity, consent of all its promoters responsible for the business are required. 

Not everyone has assets like that. Again, even if you may have a home. But, if your home loan is not fully paid, you can not mortgage it. 

Alternatively, for an unsecured personal loan, you do not need to possess any assets. So, it is advisable to go for personal loans.

Reason #5—Personal loan is an easy financing option even for medium to big purchases

If you want to purchase a vehicle, electronic goods, etc., you may need a higher amount of money at a single time. However, paying such a massive amount in one go can be difficult. So, you can take a personal loan from a personal loan app to pay for the purchases and repay it in the form of easy small payments every month.

Reason #6—Personal loans are better than using credit cards or availing of other loans

You are strictly required to pay credit card bills within a month of receiving the bill. At times, you may find it difficult to pay credit card bills. Instead, with personal loans, your repayment period starts after three months. So, choosing a personal loan is better than paying higher interest on bills of unpaid credit cards. You can also use personal loans as a debt consolidation loan to pay off all the other loans you might have.

Conclusion

There are several reasons why people choose personal loans over collateral loans. What is important is that you check the eligibility criteria, repayment capacity, etc. and make an interest rate comparison between both loan types before picking one option. Your eligibility for the loans also has a vital part to play. 

Generally, when you need loans for personal reasons or small loan amounts, availing a loan from some of the best instant loan apps in India is a better choice. Alternatively, if you need a considerable loan amount with a tenure of around ten years or more, taking a collateral loan would be a befitting choice.