Aspect | Personal Loans | Loan against Securities | Overdraft Loans | Cause based loan |
What is it? | Money borrowed from a bank or lender for personal needs like education, travel, or emergencies. | Getting a loan by using your investments (like stocks or bonds) as collateral. | A financial arrangement where a bank allows an account holder to withdraw more money than what is currently in their account, up to a predetermined limit. | Education loan, Home loan, Car loan, etc., fall under this category, where you take a loan to fulfill a specific need. |
How does it work? | You get a lump sum and pay it back in fixed monthly installments with interest. | You pledge your securities, and the lender gives you a loan based on their value. | You can spend more than your account balance, but there's a limit; interest is charged on the overdrawn amount. | The bank verifies the need for a loan and disburses it. |
Flexibility in Use | Use it for any cause | Use it for any cause | Use it for any cause | Restricted to a specific cause |
Collateral | Not required | Required | Usually required | Usually required |
Interest Rate | 11-30% p.a. | 9-11% p.a. | 9-15% p.a. | 7-12% p.a. |
Approval Process | Based on the Credit profile and background | Value of pledged securities | Account history and creditworthiness | Account history and creditworthiness |
Which loan should I consider?
Simply put, there's no clear answer to this, as it completely depends on each profile.
If you are considering a loan to fulfill a specific goal, such as buying a house, a car, or financing your education, you should take respective loans tailored for such goals. These loans are curated for specific purposes, and you might not find a cheaper alternative.
However, if you're considering a loan for emergency purposes or for a situation where banks don't offer curated loans, you can explore the following options:
- If you have investments like stocks, bonds, or fixed deposits, and your loan requirement is lesser than half the value of your investments, then you should go for a Loan against Securities, as it will be the cheapest option.
- If you have a great relationship with your bank, you can also inquire about the Overdraft loan and see if that's the most cost-effective option for you.
- Lastly, if you don't have many investments and you're in an emergency, you can check out a Personal Loan since it doesn't require collateral. The bank will offer you a loan based on your credit profile and demographics, such as location, employment type, etc.
