Borrowing money is one of the most complex decisions. It requires one to be agile and attentive. One must know all the available options in order to make a correct decision. Secured loans and unsecured loans are one of the most widely used modes for borrowing money. However, both of them have their own pros and cons. Understanding the difference and similarities between secured and unsecured loans is vital. This piece of writing shares considerable information on secured loans and unsecured loans to help you choose the better option.
What is a secured loan?
A secured loan is a loan that is obtained from a bank or non-banking financial institution in exchange for security or collateral. The borrower needs to keep his security with the loan provider to get the money. The collateral or security can be any physical asset including gold, equity shares, fixed deposits, mutual funds, life insurance policies, or a vehicle. The lender keeps the security/collateral with them till the tenure of the loan or lifetime as agreed upon. In case the borrower is not able to pay off the loan then, the lender has all the right to sell the security and recover the money. The interest rate of the secured loan depends upon several factors such as the interest rate, tenure of loan, EMI amount, principal amount, and much more.
What is an unsecured loan?
An unsecured loan is a loan that can be obtained from a bank or non-banking financial institution without exchanging or pledging any security or collateral. The loan can be availed on the basis of the credit score and past credit history. The bank or financial institutions run a thorough background check to know the creditworthiness of the loan applicant. Lenders have a close look at vital information such as tax return statements, pay slips, and account details before sanctioning the loan. The interest rate of unsecured loans also depends upon several factors such as the interest rate, tenure of loan, EMI amount, principal amount, and much more.
What is the difference between a secured loan and an unsecured loan?
One of the major differences between secured and unsecured loans is the pledging of security against the amount. Moreover, the interest rate for an unsecured loan is slightly higher than for a secured loan. The secured loan can be obtained at a lower rate of interest. The payment tenure of a secured loan is longer than that of an unsecured loan. However, this may vary depending upon the lender policies.
Secured Loan
Unsecured Loan
The lender has to pledge a security or collateral to apply for a secured loan
An unsecured loan can be availed without pledging an asset, collateral, or security.
Interest rates are lower as compared to unsecured loan
The interest rate is higher than the secured loan
The processing of a secured loan may take time as one has to evaluate the collateral before sanctioning the loan.
The processing of an unsecured loan is faster as one does not have to evaluate any security/collateral before sanctioning the loan.
The loan amount is sanctioned by taking into consideration the value of an asset, the income of the borrower, and current loans
The loan amount is sanctioned by taking into consideration the credit score of the borrower, credit history, and existing loans.
You can avail yourself a secured low even if your credit score is low
You need to have a good credit score for an unsecured loan
The value of underlying collateral correlates with the loan amount
The loan Amount depends on the borrower's income and repayment capacity
The tenure of a secured loan is longer
The tenure of unsecured loan is shorter
Examples: Gold Loan, Loan against property, Loan against Securities, Loan against FD
Examples: Personal Loan, Education Loans up to a certain amount
Which One You should consider a secured loan or an unsecured loan?
The financial crunch and need for immediate finance can occur at any time. One must think carefully and evaluate all secured and unsecured loans minutely to know their advantages and disadvantages. The features of both the loan types are distinct.
If you have a good credit score and capability of repayment then, you may opt for an unsecured loan. Whereas, if you want quick finance, have a low credit score, and an asset to pledge then, you can opt for a secured loan. However, it is imperative to do comprehensive research and study various parameters of loans such as interest rate, interest compounding, loan tenure, and pledging terms and conditions before applying for a secured loan. Study the documentation requirements in detail and select a loan option on the basis of your repayment capacity and financial position.
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