Loan Against Insurance vs. Personal Loan: Which is Better?

At Mera Kal, we know how important it is for you to understand and weigh your financial options clearly, and then take the right decision. So here we are, with a detailed post where you will be able to compare an insurance loan vs personal loan. When financial needs arise, the options available can be broadly categorized into formal lending and informal liquidity sources. 

Informal liquidity sources include borrowing from friends and family, participating in chit funds, selling gold, or breaking a fixed deposit (FD). While these can provide quick relief, they may come with emotional obligations or financial losses (e.g., losing future interest from an FD).

Formal lending options, on the other hand, are structured, and regulated, and include both unsecured loans (e.g., personal loans) and secured loans (e.g., loans backed by assets like property, gold, or insurance policies). These formal channels offer clear repayment terms and are typically less emotionally taxing compared to informal sources.

This blog focuses on two formal credit options: Personal Loans and loan against life insurance policy (LAIP). We'll explore their features, benefits, and drawbacks to help you decide which suits your financial needs better.

Demystifying personal loans

A formal personal loan is an unsecured loan from a regulated bank or NBFC that does not require any collateral. It is one of the most popular borrowing options due to its flexibility and quick disbursal process. Personal loans can be used for a wide range of purposes, such as covering medical expenses, funding education, managing wedding costs, or financing travel.

Key features of personal loans

• Loan Amount: Typically ranges from ₹50,000 to ₹25,00,000, depending on the lender and borrower's eligibility.
• Eligibility: Based on factors like income proof, employment, and credit scores.
• Interest Rates: Generally higher, ranging from 10% to 30% per annum, depending on your creditworthiness, the perceived risk the lenders are pricing in, and the type of lender and their cost structure.
• Tenure: Short-term, usually between 1 to 5 years.
• Processing Time: Fast, with some lenders offering same-day approval and disbursal.

Pros of Personal Loans

• Flexibility: Can be used for any purpose without restrictions.
• No Collateral Required: Ideal for those who don’t have assets to pledge.
• Quick Approval: Suitable for urgent financial needs.
• Credit-Building Opportunity: Timely repayment helps improve your credit score.

Cons of Personal Loans

• High Interest Rates: Costs are higher compared to secured loans due to the absence of collateral.
• Stringent Eligibility Criteria: A high credit score and stable income from approved employers are typically required.
• Repayment Burden: Shorter tenure means higher EMIs, which could strain monthly budgets.
• Penalties: Delays in repayment can attract hefty penalties and negatively impact your credit score.

Personal loans are best suited for individuals who need quick, unsecured funds and have the creditworthiness to secure favorable terms. However, their higher cost and stricter eligibility criteria might make them less appealing compared to secured loan options for some borrowers.

Secured Loans: loan against insurance policy, and more

Secured loans are a type of formal credit where you pledge an asset as collateral to secure the loan. This reduces the lender’s risk and often results in lower interest rates compared to unsecured loans. Secured loans are ideal for borrowers who have assets to pledge and want larger loan amounts or better repayment terms.

Types of Assets You Can Pledge for Secured Loans

1. Property: Used for loans like home loans or loans against property.
2. Gold: Short-term financing option, especially during emergencies.
3. Fixed Deposits: Loans taken against the value of an FD without breaking it.
4. Life Insurance Policy: Loans against the policy’s surrender value 
5. Mutual Funds or Stocks: Loans based on the current value of your investments.

Key Features of Secured Loans

• Collateral Requirement: An asset must be pledged.
• Loan Amount: Based on the value of the asset, typically 60%-90% of its market or surrender value.
• Eligibility: Less dependent on credit score; the focus is on asset ownership and valuation.
• Interest Rates: Lower than unsecured loans, usually between 8% to 15%.
• Tenure: Flexible, often longer than personal loans, depending on the asset.

Pros of Secured Loans

• Lower Interest Rates: Due to reduced lender risk.
• Higher Loan Amounts: Linked to the value of the pledged asset.
• Longer Tenure: Helps reduce monthly EMI burden.
• Easier Approval: Suitable for those with lower credit scores.

Cons of Secured Loans

• Risk of Asset Loss: Defaulting on the loan could lead to losing the pledged asset.
• Asset Dependency: Loan eligibility is tied to the ownership and valuation of an asset.
• Longer Processing Time: Involves valuation and verification of the pledged asset.
• Restricted Usage: In some cases (e.g., home loans), the funds must be used for a specific purpose.

Eligibility and Pricing

1. Eligibility:
   • Ownership of the asset to be pledged.
   • Consistent income to ensure repayment capability.
   • Basic documentation, including proof of asset ownership.
2. Pricing:
   • Interest Rates: 8%-15%, depending on the asset type and lender.
   • Processing Fees: Typically 0.5%-2% of the loan amount.
   • Penalties: Lower for prepayment compared to personal loans.

Secured loans are an excellent choice for borrowers who have valuable assets and want to enjoy lower interest rates and higher loan amounts. However, it’s crucial to ensure timely repayment to avoid the risk of losing the pledged asset.

 What is a Loan Against Life Insurance Policy?

A loan against insurance policy is a type of secured loan where you pledge your life insurance policy as collateral. It is available for policies that have accumulated a surrender value, such as endowment or money-back policies. This loan allows you to access funds without surrendering your policy, ensuring that you retain its benefits while meeting your financial needs.

At Mera Kal, we offer loan against insurance for policies issued by major insurance providers such as LIC, SBI Life, HDFC Life, Kotak Life, just to mention a few. 

Pros of loan against insurance

• Retention of Policy Benefits: Your policy remains active, and its maturity and death benefits are intact.
• Lower Interest Rates: Typically, 9%-12%, much lower than personal loans.
• No Credit Score Requirement: Ideal for those with low or no credit history, helping to build a bureau profile.
• Quick and Simple Process: Minimal documentation and fast approval.
• Flexible Usage: Funds can be used for any purpose.

This loan is a great way to secure funds without losing your policy benefits, while also helping to improve your credit profile.

Comparison Table:

When to Take a Personal Loan vs. Loan Against Insurance

Choose a Personal Loan When

1. You don’t have an asset such as an insurance policy with sufficient surrender value.
2. You need a large loan amount quickly, with no collateral.
3. You have a strong credit score to secure favorable terms.
4. The urgency is so high that immediate disbursal is the top priority.

Consider Loan Against Insurance When

1. You own a life insurance policy with a substantial surrender value. To know your surrender value, you can use our surrender value calculator.
2. You want a lower-interest loan or don’t have a credit score.
3. You are considering surrender for liquidity.
4. You prefer a straightforward process with minimal eligibility requirements.

By understanding the unique advantages of both options, you can select the one that best aligns with your financial needs and circumstances. Visit Mera Kal for financial assistance that is not just reliable, but easier and quicker too!