Personal loans come with higher rate of interest as compared to other loans.
If you’re wondering why, it’s because they’re are unsecured.
A secured loan is a loan that require a property to be pledged and, therefore, has a lower Interest Rate. For example, Home Loan is a secured loan, guaranteed itself. If the borrower defaults on the loan, the lender can take possession of the home to recoup the money on the defaulted loan. The fact that the lender has the collateral in case of default is part of what drives down Interest Rates on secured loans. In addition, the very fact, that the borrower's home is used as collateral, ensures the lender that the borrower intends to repay the loan.
An Unsecured Loan does not use collateral. Since no property is used to guarantee the loan, it’s a greater risk for the lender. For example, if a borrower uses a home equity loan to obtain a loan of Rs 15, 00,000, the lender is assured that the borrower won’t default on the loan because it is secured by the home. A personal debt -- one without collateral -- for the same amount is not as safe for the lender. Because of this, the lender charges higher Personal Loan Interest Rates to balance out the greater risk.
Though the interest rates on unsecured loans tend to be higher as compared to other secured loans like Car Loan, Home Loan, still they possess low-interest rates as compared to credit card rates. If you are not opting for secured loans, try opting for Personal Finance rather than going in for Credit Card.