Pros and Cons of Loans - Secured loans and unsecured loans

Loans are mainly of two types - Secured loans and unsecured loans. Secured loans are those loans that are availed on the security of an asset. Typical examples of secured loans are home loans, vehicle loans, gold loans, loans against fixed deposits, etc. On the other hand, unsecured loans are those loans that are allowed without the security of any underlying asset. The best examples of an unsecured loan are personal loans or credit cards. Personal loans are one of the widely availed loans in India. According to the Reserve Bank of India, unsecured personal loans account for 8% of the credit portfolio of banks in India. Personal loans grew at a rate of 20% in the past year. Personal loans can be availed easily from a number of sources like banks, NBFCs, and online fintech lenders. The biggest advantage of a personal loan is that there is no requirement of security, so even if the loan is not paid back on time, then you will not have anything to lose, like in a secured loan. Let us explore the pros and cons of availing loans from each of the sources mentioned above.

Pros and Cons of Unsecured Personal Loans from Banks

Banks are the largest financial institutions in a country and are the first source for funds for many. They are also the largest lenders of personal loans:

Pros of Personal Loans from Banks
  • Lesser Interest Rates than other Sources for a Personal Loan

    Personal loans from banks carry the lowest rate of interest than other sources like fintech lenders or NBFCs. The rate of interest for personal loans from banks starts from 10.5%.

  • Special Privileges for the Account Holders

    When you avail of a personal loan from a bank where you already have an account and have been maintaining a good relationship with the bank, then you may be allowed certain privileges like lesser processing fee, etc.

  • Opportunity to Avail Pre-Approved Loan

    Banks often come out with pre-approved loan offers for some of its customers who show good levels of creditworthiness and maintain good account balances at all times. These loans are pre-approved and help you avail instant personal loans, sometimes at better terms and conditions.

  • Possibility of Availing Higher Loan Amounts

    The upper limit of personal loans from banks can go higher than the ones offered by fintech lenders. For Ex: Some banks allow personal loans of up to Rs 25 lakh.

Cons of Personal Loans from Banks
  • Stringent Eligibility Conditions

    The eligibility conditions to avail an unsecured personal loan from banks are quite strict. They look for higher levels of creditworthiness, higher minimum monthly income or employment with blue-chip companies

  • Longer Processing Time

    Though banks have fast-tracked their processes, they may still take from 3-5 days to process a personal loan application.

  • Rigid Repayment Structure

    Personal loans from the bank come with a strict repayment structure like a penalty on prepayment, allowing prepayment only after a certain period of time, etc.

Pros and Cons of Unsecured Personal Loans from NBFCs

Non-Banking Financial companies are not banks but undertake different lending activities like personal loans, vehicle loans, education loans, business loans etc. But the main difference between NBFCs and banks is that NBFCs are not allowed to raise deposits from the public.

Pros of Personal Loans from NBFCs
  • Less Stringent Eligibility Criteria

    Non-Banking financial companies are not as strict as the banks about the eligibility criteria and other conditions needed to avail personal loans. The credit score requirement is lesser than the banks.

  • Involves Lesser Processing Time

    Personal loans from NBFCs are known to be easier to avail than the banks. The documentation is easier with an NBFC. The result of easy documentation and easier eligibility criteria is lesser processing time on your loan. So when your requirement is of an urgent nature, applying for a personal loan from an NBFC may turn out better.

Cons of Personal Loans from NBFCs
  • Higher Interest Rates than Banks

    The rate of interest charged on banks off late is linked to the Repo Rate of the Reserve Bank of India, therefore the loans availed from the bank comes with a lesser interest rate. But NBFC interest rate is attached to their individual Prime Lending Rate which differs between companies. So, when you avail of a personal loan from an NBFC, the interest rate is higher than a bank.

  • Higher Processing Fee

    NBFCs may charge higher processing fees on their personal loans. This may come up higher than the ones charged by the banks. Processing fees at banks for personal loans range between 0.5%-2% of the loan amount, but the processing fee for loans from NBFCs are higher than 2%.

Pros and Cons of Unsecured Loans from Online Fintech Lenders

Fintech lenders are new-age lenders which make use of advanced technologies like artificial intelligence and data to make lending decisions. These lenders operate online.

Pros of Unsecured Personal Loans from Fintech Lenders
  • Totally Digital Process

    One of the biggest advantages of an unsecured personal loan from fintech lenders is that they follow a totally digital process. This is right from the application to the disbursal. There is no requirement for you to visit any branch or submit any photocopies of documents for availing a personal loan.

  • Quicker Processing Time

    As online fintech lenders follow a completely digital process for allowing loans, their processes are quick. Loans are often disbursed in a matter of hours after the approval. So, the next time when you have the need for a personal loan, you know who to approach!

  • Available on Lower Credit Scores

    Online fintech lenders use their in-house credit assessment models. These models assess the creditworthiness of their borrowers based on many factors in addition to the ones considered by the credit bureaus. This allows fintech lenders to better assess the creditworthiness of borrowers and allow loans to those individuals who find it difficult to avail credit from banks/NBFCs.

  • Easy to Avail

    Fintech personal loans can be availed over their websites or on their apps from the comfort of your home or office at any time of the day. The process of availing fintech loans is very interactive and easy. Some fintech lenders have launched their apps in multiple regional languages so that all sections of the population find it easier to avail of loans.

Cons of Unsecured personal loans from fintech lenders
  • Higher Rate of Interest than Banks

    The rate of interest charged by fintech lenders is higher than the ones charged by the banks.

  • Unaccessible to Non-tech Savvy Population

    Fintech loans can be availed only on an app or the website which may come across as a challenge for the non-tech savvy people.

  • Trust Issues

    As the fintech lenders do not maintain a brick and mortar presence, some people may have issues trusting these new-age lenders and may be reluctant to share their financial information to avail loans.

  • Lower Amounts of Loan Available

    The upper limit of loans that you can avail from a fintech lender may be limiting. Banks and NBFCs allow loans of up to Rs 25 lakhs as a personal loan. But the maximum that you can avail from a fintech lender depends on the lender.

Pros and Cons of unsecured PayDay loans

PayDay loans are also given out by some fintech lenders. These are very short term loans ranging from 8 to 30 days. They have to be repaid with interest at the end of the loan term.

Pros of Unsecured Payday loans
  • Meets the Immediate need for Funds

    When you are in need of immediate funds, going to a bank or an NBFC may not meet your needs. Payday loans which are short term loans based on your salary may match your need for funds immediately.

  • Quick and Easy to Avail

    Payday loans can also be availed over their apps or websites, hence they prove to be quick and easy. If there is a prior arrangement with your employer there might not be many checks to avail a payday loan.

  • May not Need a High Level of Creditworthiness

    As these loans are lent for a short period of time, high creditworthiness in the form of a high credit score might not be required.

Cons of Unsecured Payday loans
  • High-Interest Rates

    Payday loans come with extremely high rates of interest, which may upset the financial budget of the borrower

  • Inability to Spread out EMIs

    Due to the short term nature of the loan, the entire amount of the loan with the interest has to be repaid at the end of the loan. Unlike other personal loans, there is no scope of spreading the repayments over a certain period of time.

  • Easy to Fall into a Debt Trap

    As payday loans are easily available, it is very easy for anyone to avail these loans and get into a debt trap