The idea of availing a personal loan with security might seem amusing to many! Traditionally, a personal loan means an unsecured borrowing with no financial worry for the borrower about losing assets. The idea of a secured personal loan is almost like going against the tide! However, there is more to this than meets the eye. In this article, we shall study the situations when a it is a good idea.
1. Avail lower interest rates:
A personal loan like every other loan involves repayment by way of EMIs. Thus, the interest rates have a huge bearing on the EMI burden. It is common knowledge that a loan with collateral provided would result in reduced risk for the lender. The lender can recover the dues in the event of a default by liquidating the pledged assets. This would translate into attractive interest rates for the borrower.
2. Getting a loan with a weak credit score:
Yes, it’s possible! One can avail a personal loan by providing collateral, even if one has a slightly weak credit record. This is because the lender is mainly concerned with the repayment of the loan amount. It is possible either through EMI repayment or through the sale proceeds of the assets taken over. The lender assumes lower risk in case of a secured personal loan. The lender would be willing to overlook the credit standing in case the borrower is able to hypothecate valuable assets that can be easily converted to money.
3. Start on a clean slate:
In case the borrower has a weak credit track record, one can undo the past defaults by availing a secured personal loan and regularly servicing the EMIs on time. This would help build a credible borrowing history. Thus, the borrower would be able to easily avail loans in the future under favourable terms and conditions.
4. Improve credit score:
A credit score can be enhanced with a secured loan in the following ways:
Different types of loans would ensure a better credit standing. Thus, along with credit card, an unsecured product, it would be worthwhile to opt for a secured personal loan with bad credit.
A lower credit utilization ratio i.e. the credit used as compared to the available credit limit would result in a favourable score. Thus, with a secured loan, the total amount of credit available would increase.
Pay back on time: This is but obvious. Any delay or default on repayment would adversely impact the borrower’s score.
5. Instils financial discipline:
Since the borrower is always mindful of the fact that possession of the valuable assets might be lost in the event of a default, he or she would endeavour to promptly pay the EMIs on time. This instils a sense of financial responsibility and discipline in the borrower.
6. Avoid a debt trap:
Since one’s valuable assets are tied up to an existing secured personal loan, one would think twice before availing another loan. This is because, every loan involves EMI repayment. Thus, it is financially prudent to first settle an existing loan before assuming further debt. This would also prevent reckless borrowing. There is no danger of landing in a debt trap i.e. borrowing further to pay off existing debts.
In conclusion, if one wants to get the benefit of lower interest rates, it is advisable to opt for a secured personal loan with collateral cover.
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