Why are Personal Loans the Right Choice Over Collateral Loans?

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Whether it is gliding over financially difficult times or building a healthy credit score, many people choose to take loans from various lenders available in the market.

However, one must be quite careful of selecting between an unsecured or secured form of loan while considering it.

While unsecured loans are free from any kind of collateral, in the case of a secured loan, the financial institution usually demands some sort of valuable asset be submitted or mortgaged against the loan amount that shall be used to settle the debt in case the borrower fails to pay the EMIs on time.

While one can get a personal loan online by applying through a financial institution based on their eligibility, secured loans are slightly harder to obtain as the lender requires an instantly available asset against the loan amount.

While it is not mandatory to mention any specific personal loan requirements as they do not have any end-use obligation, it is compulsory to mention the purpose of the loan while applying for secured loans for documentation and verification purposes.

Read on to know more about the various advantages of applying for a personal loan as compared to collateral loans.

  • Avoid risking your asset
    You should opt for a secured loan only if you are confident about repaying the complete loan amount, both principal as well as interest, in the form of timely installments.

    Failure in doing so would result in the seizure of the valuable asset and if the submitted collateral is your only prized possession such as property, gold, or shares, the scenario could give you sleepless nights.

    A simple solution to avoid this conflict is applying for an unsecured form of loan i.e. a personal loan that allows you to keep your asset while taking care of your financial needs. Also, you should always strive to pay the EMIs on time to build good credit health irrespective of the type of loan applied for.

  • In the case of small loan amounts
    You should be aware of the fact that the financial institutions usually offer only secured loans for large amounts such as 20 lakhs or more keeping in mind the repayment capacity of the borrower as well as having a valuable asset at their disposal. However, in the case of smaller amounts i.e. up to 10 lakhs, the lenders have different criteria for both secured and unsecured loans.

    So, if given a chance to choose, you should most definitely apply for a personal loan for the aforementioned smaller loan amount as they require no collateral and have short repayment tenures which help in settling the amount quickly without any hassle.

  • Repayment Reliability
    If you have a steady source of income that is sufficient enough to repay the loan amount within the stipulated time approved by the lender, then you should opt for a personal loan because risking your valuable asset without any compulsion is not recommended at any cost.

    This is because as long as the repayment is pending, you will be unable to use the asset as it remains locked up with the lender.

    However, you must be smart in maintaining the balance between acquiring secured and unsecured loans because opting for unsecured loans all the time may affect your credit health negatively.

  • Saving the asset for emergencies
    If you have opted for a personal loan, you are free to use the valuable asset as per your requirement. You can exercise this independent control in selling or liquidating the asset in case of any emergency without any interference from the lender.

    On the other hand, if the asset is submitted as collateral against the loan amount, then obtaining permission from the lender is mandatory which could prove to be quite demanding and frustrating.

    Therefore, save your assets as a backup for financial emergencies by choosing an unsecured loan so that you can utilize them to obtain funds instantly. Keeping your assets readily available can also help if you plan to invest them in a business or any other purpose.

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