In giving personal loan bank has a greater amount of risk than giving a home loan. If due to any reason the borrower decides to default in the repayment of a personal loan the bank has to face problem as it does not have taken any collateral or security, i.e. it does not have anything to sell off and reclaim the amount loaned out.
Therefore the risk on such loan defaulters is charged through interest rate by the bank. Hence, individuals who repay the personal loan on time also pay for even those who don’t. On the other hand home loans are cost less than personal loans as the bank have taken collateral or security which it can always sell the house bought with the home loan and reclaim the amount still to be paid.
Although, there are positive ways in which individuals can take a loan and use it for personal purposes and also avoid paying an interest as high as that on personal loans.
One of the easiest ways is a loan against a fixed deposit. Bank can have an option of liquidating the fixed deposit in case the borrower defaults. Thus the interest rates charged on such loans are usually a few percentage points higher than the interest rates of the fixed deposits.
This is definitely much lesser than the interest rate charged on personal loans. So in case you have a fixed deposit lying with you and you are not going to use it for meeting a personal need, you can use it to get a loan from a bank.
Mostly all loans taken against collaterals always can turn out to be cheaper than personal loans. For this inform the bank that you will be repaying the loan within the set time — not verbally but by action. Keep a security, which the bank can claim if needed.
In turn banks will easily give you a loan at a lower rate, as they are confident that you would rather pay off to get back the security that you have tendered.
You can take such loans by tendering life insurance policies, National Savings Certificate, RBI Bonds, gold jewellery, bank fixed deposits, shares and debentures.
Some of the banks even accept mutual funds as security.
On such loans along with the lower interest rate, the processing fees charged for loans against security (up to 0.5% of the loan amount) are also low as compared with those on a personal loan (1-2% of the loan amount).
Although the rate offered on such loans is quite low then also such loans are not very popular. That is why banks have not been promoting such loans actively.
Previously such loans were popular in at the time when the banks were not actively offering personal loans. Maybe it’s time, they might comeback.