A personal loan is an unsecured loan given by a lending institution such as a bank to a borrower. The borrower can be an individual seeking credite for purchasing household items or for organizing ceremonies. The borrower can also be a company or a business group in need of credite to work as capital for their businesses. Such unsecured credit given by banks is mostly for a short term period of time and the rate of interest is relatively higher compared to a secured loan.
In a personal loan, the customer does not have to reveal the purpose of taking the loan to the bank. It could be carried out for any purpose. However, getting a credit through such a loan is relatively difficult since banks abide by certain regulations to understand and check the reliability of the borrower. There is an intense review of the borrower, understanding his credit history and financial credibility. In some cases, where the bank is unable to make verification on its own, it hires an underwriter or an external agency to verify the credibility of the borrower.
If everything seems clear and it has been assessed that the borrower has a fair amount of repayment capacity, then the unsecured loan is extended to him. The unsecured loan is offered for a short period of time, usually five to ten years. The loan agreement between the bank and the borrower explains the terms and conditions and if the latter becomes a defaulter, he may have to end up paying a penalty or a higher rate of interest to the bank. A borrower becomes a defaulter not only when he fails to repay the installments on time, but also by other reasons such as giving false information.
A housing loan, on the other hand, is referred to as a credit which is a secured one. Secured credite are given on long-term basis to individuals for a specific purpose. The purpose is made clear to the bank while applying for such loans. credit could be requested by the borrower for purchasing an apartment or for buying a piece of land. Under secured loans, backing of assets is essential. The borrower has to surrender some of his assets as part of the security to the bank.
Then only the bank would be able to extend the loan on long term basis. The long term could be ten years, twenty years and even thirty years depending upon the country of operation. In secured loans, property held by the borrower is mortgaged. The bank reserves the right to seize or foreclose the property or any other assets if the borrower fails to make the repayments. Even in secured loans, the credit history of the borrower is assessed by the underwriter.
But along with that the market value of the property is also assessed and the loan is extended taking into consideration this market value. The rate of interest charged by the bank in a secured loan is relatively less on annual basis, but since it is for a longer period of time, the borrower ends up paying higher amounts to the bank.