People are very familiar with certain kinds of loans. It can be considered as a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or the principal amount.
Different kinds of loan instruments are available in the market and each one of them has its own unique characteristics and suitability. Loans can be classified into two. They are unsecured loans and secured or collateralized loans.
The unsecured loans are not backed by any collateral securities, so these loans usually have higher interest rates than the secured loans because the risk of default is comparatively higher than that of secured loans. Credit cards and signature loans are the best examples of unsecured loans.
The loans which are backed by the collateral securities are known as secured loans. The interest rate is also lesser as compared to the unsecured loans. The borrower may also have greater flexibility in comparison to an unsecured loan, such as the option of a longer repayment tenure and higher loan amount with lower interest. Different types of secured loans are available in the market, it includes Gold loan, Car loan, Property loan, loan against an insurance policy, mutual funds, bonds, shares, Fixed deposits, etc and we can select the appropriate loan product depending on the amount of the fund required, tenure of the loan, the type of asset available to pledge, and the interest rate.
Gold can be used as collateral security for taking loans. They provide loans up to 75% of the prevailing market value of the pledged gold subject to the lender’s loan amount. It is an attractive option for those who have some gold with them and whose loan requirement is not huge.
If people don’t want to pledge their investments, there is a better option called a loan against a car. Bank provides an LTV of around 50% of the assessed value of the car but some lenders allow a high LTV of up to 150% of the value of the car. The loan amount totally depends upon the car’s model, year of purchase, and condition.
There is another choice of loan against an insurance policy. If someone has a traditional life insurance policy like an endowment plan, they can use it as collateral security to get a loan. They calculate the paid-up value, and not the sum assured, of the insurance policy for estimating the maximum permissible loan amount to a borrower.
If the required amount is high we can proceed for a property loan. The tenure of repayment is long as compared to other loans. Banks allow an LTV of 60-65% for such loans and the interest rate is around 7-10% p.a. which depends upon the loan amount and tenure.
The best method for meeting your requirements is secured loans because they are very attractive. Try to avoid collateralizing a high-value asset for a low-value loan. Keep a thorough repayment plan before applying for any secured loan. Compare with various options that are provided by the banks or financial institutions.
