To help simplify the matrix for you, here is what you need to know about the two basic types of loans – secured and unsecured. Under secured loans, the lender attaches some asset as collateral security. In this case, the borrower has to make some down payment, usually 10-20%, along with the attached asset. In this case, the risk to the lender is less, as the borrower knows that a default will mean not only the loss of the asset, but also the down payment. Home loans and auto loans are good examples of secured loans.

On the other side, unsecured loans do not involve down payment or collateral security. The lender relies solely on the credit rating of the borrower. In case of a default, the lender is left with very few options to recover the money. The risk of lending is high and so is the rate of interest. Personal loans, credit cards, home-improvement loans, student loans, and loans on electronics or home appliances fall under this category.

A personal loan is also sometimes called ‘Signature loan’ as all that is needed is the borrower's signature on the loan application form! However, usually, you do need to submit some documents to avail of a personal loan including age proof, residence proof, and photographs, along with a signed application form and salary slips, your latest Form-16, and employment proof.

Your credit rating needs to be high to avail of a personal loan. Banks rely on CIBIL ratings for sanctioning your loan. For personal loans, you will mostly be charged a much higher rate of interest than for secured loans. Depending on character, capacity, capital, collateral, and conditions, the interest rate may be between 13% and 24%, sometimes even more.

Regular monthly income is the general criteria for availing a personal loan. Mostly salaried people qualify for this type of loan. While deciding the loan amount and tenure, your age, qualifications, city of residence, and job tenure are usually considered, along with your monthly salary. The loan duration generally ranges from one year to five years.

Prepayment option: Prepayment or foreclosure option is available, and lenders charge a fee for foreclosing a personal loan. The fee may vary from lender to lender. There is also a lock-in period for foreclosure. Again, different lenders have different lock-in periods.

Part prepayment: Some lenders offer a facility of making additional payments apart from the EMI. As the interest is high, repaying the personal loan as soon as possible is advisable.

Post-dated cheques (PDC): These are taken before the disbursal of the loan. PDCs need to be undated. It is a kind of security that the lender will keep against any default in payments.

Loan top-up: In case of good credit history, the lender may offer you an extra loan at better interest rates. The new payment schedule and the EMIs are revised accordingly.

Loan takeover is also possible. Here one lender takes over the loan of other lenders. As the first bank considers it to be a foreclosure case, a foreclosure fee is required to be paid.

Personal loans are easy to get and their disbursal tends to be quite fast. People who do not have collateral security or who do not want to attach other assets as collateral security usually avail of this type of loan. For some, the short loan tenures are also appealing. This financial instrument is usually an easy and fast way to fund your short-term and immediate needs.

 

Disclaimer: This Article is for information purpose only. The views expressed in this Article are personal and do not necessarily constitute the views of Kotak Mahindra Bank Ltd. and its employees

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