Advantages And Disadvantages Of Prepayment And Partpayment

Personal loans have the highest interest rates, apart from credit card interest charges for unpaid amounts. The interest of personal loans ranges from 15% to more than 20% at times. These have a premium interest since these are unsecured loans in nature.

Unsecured loans are those which do not ask you to give any form of collateral or security or guarantee of payment. Thus, the lender takes a huge risk by giving such loans. To offset this risk, they seek to get as much of their loan amount as soon as possible by exacting a high interest rate. So for instance, if the loan was for Rs. 100000 and the interest rate was 20%, their given amount would come back to them within five months, but if you take more time than that to repay, you’ll end up losing a lot. Even Rs. 20000 interest for a Rs. 100000 loan is a big amount. However, for borrowers looking to get unsecured loans, this is the thing they need to deal with.

A personal loan, a kind of unsecured loan, is very popular in India as it helps to get over temporary financial problems. These are used to finance weddings, buy medical items or get someone treated at a hospital, finance a vacation, buy a home, or anything one wants. Different banks have different charges and fees for such loans. A customer will have some benefits if they pay either partly or by prepaying the loan.

Full prepayment

If you prepay the loan early on in the loan’s tenure, you’ll be saving a lot on interest especially if it is a personal loan. Generally, personal loans have a lock-in period after which one can prepay the whole outstanding amount.

For instance, if your personal loan is of Rs. 2 lakhs and if the interest rate is 15% for a term of 5 years, your monthly EMI comes down to Rs. 4758. You pay Rs. 29039 within the first year towards the premium along with Rs. 28057 as interest. If you decide to prepay the rest of the amount at this time, you’ll be paying Rs. 57422 less in interest!

The real trick is to prepay the whole amount early on in the loan’s tenure. This allows you to enjoy all the benefits of the loan without suffering the disadvantages which high interest brings on. Even if one reaches almost the end of the loan’s tenure and has some excess cash left, one can prepay the rest of the amount. One still saves money that way.

However, some banks do charge a penalty for doing so. The penalty charge is between 3% to 5% of the loan if you want to prepay. Recently, the RBI has told banks to stop charging this penalty for customers who are prepaying loans.

Very often, banks do charge a penalty for prepayment.

However, this directive still applies only to loans that are taken on a “floating interest rate” basis. If the interest rate for your personal loan is fixed, your penalty shall not be taken away. However, some private and public sector banks do not charge this. Thus, if you have idle cash at hand, you can easily prepay the loan at no extra cost.

How to Get Gold Loan Now - How Safe Are Gold Loans in 2021?

You may be able to ignore the gold ornaments at home, but you can’t ignore the hue and cry over gold loans these days. This is partly due to soaring prices, and partly due to increased consumerism, along with evolving social norms. Gold loans are seeing not just unprecedented rise right now, but are stated to increase in popularity in the future as well.

Is the Gold Loan Market Growing?

Think about this: The organized gold loan market in India was worth 25,000 crore in FY 2009. It grew at a compound rate of 38% between FY 2002 and 2009. Today, it is expected to grow at a compound rate of 40%. It is stated to reach a market value of 50,000 crore. According to a study by the ICRA Management Consulting Services, a study shows the alarming situation of pawn brokers. Big players like NBFCs, new Fintech companies and others are coming into the market, making the work of small players very difficult. However, there are other reasons as well.

Firstly, it is all about convenience. Sometimes, when customers pledge their gold for loans, it is because of desperation due to some situation. However, it is still are step more convenient than other personal loans. One can get gold loans today faster.

Secondly, gold loans are known for being offered with a low interest rate. While it is currently increasing certainly due to increasing demand, it is still less than unsecured personal loans. Gold loan interest rates are from 10% to 24% per year while other personal loans have interest rates of 16% to 26%. Remember that interest rate depends on your credit profile.

After all this, we’d like to say that it is far better to take a gold loan than a personal loan because of lower interest rates. Gold loans are secured loans. An additional reason to take this is that most NBFCs and banks will allow you to pay interest on a monthly basis, while the principal can be paid at the end of the loan period. From the perspective of interest, this arrangement works much better.

At the same time, you can determine the amount of loan based on the market value of your gold items. This means you do not need to show any income proof, unlike personal loans in which the loan is determined after the scrutiny of your income. You’ll need a lot of income proof to get a personal loan. Not so in case of gold loans, since income is not so important here. What is important is that you submit your gold with the bank. That is all that’s needed. And then, you pay back the loan to redeem your gold. Banks like HDFC and ICICI may ask for your personal details such as ID, and this verification process takes an hour. Others like Manappuram and Muthoot sanction your gold loan in a few minutes.
Is it Better to Get a Gold Loan Now?

Instead of hoarding your gold at home in a locker, why not put it to good use? You don’t have to wait for an emergency to use them either. Have a business to finance, or an education to fund? Want to go for a dream vacation? Your gold can be used for anything. After all, these are personal loans. Financial institutions give you up to 70% to 80% of the value of your gold.

Unlike the past, pledging your gold is not longer seen as taboo. That is why right now, gold is seen as a convenient and legitimate way of meeting any emergency, or to get quick funds for anything. Right now, gold loans are taken by people from all walks of life seeking to meet urgent situations, or for bettering their lot. Others choose this because gold loans are easier to get than other types of personal loans. Right now, gold prices are soaring, and banks themselves are pushing customers towards gold loans.

That being said, you should not take a gold loan wantonly without thinking. After all, a loss of gold is still a serious and irredeemable loss. It’ll look bad if you lose your family heirloom, right? If you fail to pay the loan back on time, banks can charge a higher interest, and auction off your gold. Thus, before taking such a credit, you should still weigh the pros and cons. There are risks, and you should be aware of them.

Secured and Unsecured Loans - How Do Unsecured Loans Work?

Before you decide to choose one, you should know which would be the most suitable one for your needs. Read on to know more about these two types of loans and understand how they work.
Secured Loans

When you provide the lender with collateral (a personal asset that has equal or greater monetary value than the borrowed amount) against the money that you borrow, it qualifies as a secured loan. It is called 'secured' because the collateral serves as a security for the lenders. In case you fail to repay the loan, the lender can confiscate the asset and sell it off to make up for the loss. Home loans, Auto loans and Secured credit cards are a few examples of this kind of loans.

How Does It Work?

When you take a secured loan, you promise a valuable asset to the lender in case you fail to repay. You get to keep this asset as well as build your credit as long as you are making timely payments. If you fail to pay, the lender can take away the asset. When you successfully pay off the entire loan, the asset becomes yours completely.

Secured loans are considered to be of lower risk as the collateral ensures that the lenders are not at high risk of loss. Hence, it is easier to qualify for a secured loan even if you do not have a high credit score. When you take a secured loan, you might be able to borrow larger amounts at lower interest rates and better terms.

What Happens if You Default?

Well, if you take a secured loan, you agree to hand over the collateral to the lender in case you fail to pay. Therefore, the lender has the legal right to take possession of the asset. If you fail to pay your auto loan, the car will be repossessed by the lender. If you default on your home loan, the lender will foreclose your home. If you are unable to pay your secured credit card bills, the lender can forfeit the security deposit.

All these instances will have a negative impact on your credit score, and leave a derogatory remark on your credit report. A serious delinquency like a repossession or a foreclosure can remain on your credit report for seven years.
Unsecured Loans

An unsecured loan doesn't have any collateral attached to it for security. The lender judges you by your creditworthiness before lending an amount to you. It is comparatively difficult to qualify for an unsecured loan and it is mandatory that you have a good credit history. Credit cards and personal loans are examples of unsecured loans .

How Do Unsecured Loans Work?

Unsecured loans do not include any collateral. Hence the lenders have nothing to claim if you default; they take a huge risk when they lend the money. However, the lenders and the borrowers must agree to certain terms for repayment. These terms generally include the time by which the money has to be returned and the interest rates that are applicable.

You cannot get an unsecured loan approved until you have a good credit score and prove that you are creditworthy. Usually, unsecured loans have a higher interest rate and stringent terms.

What Happens If You Default?

If you fail to repay an unsecured loan, your credit score takes a blow. There might not be collaterals against unsecured loans, but that doesn't let a borrower escape easily. Usually, late payments are the most important factors that affect your credit scores. Lenders can impose an exorbitant rate of interest on defaulters. The burden of defaulting on such a loan might drive you into debt.

A delinquent account could be written off to a third party agency as a collections account. If you are a severe defaulter, lenders could take legal actions against you and you could land in a terrible lawsuit. All of these will add a derogatory remark on your credit report; future lenders will find these remarks on your credit report, interpret them as red flags and refuse to give you credit.
Secured and Unsecured Loans - Their Impact on Credit

Irrespective of the type of loan, if you default on a loan, your credit history will suffer. Your credit score will certainly reduce, but a few other factors in your credit history will determine the rate of this reduction.

When you default on an unsecured loan, you get a few chances to make amends. Your credit score reduces by 50 to 100 points, depending upon the time of delay; you get more than 120 days to make the payment before your account is written off as a delinquent account.

However, if you default on a secured loan, the lender immediately seizes the collateral and reports it to the bureaus; such a derogatory remark can single-handedly reduce around 100 to 150 points.