Secured vs Unsecured Loan - Know the Difference

​​​Potential borrowers who are seeking a loan from banks and financial institutions must know the difference between a secured and unsecured loan. This helps them to make an informed decision when it comes to choosing the best funding solution that meets their needs.

Loans can be broadly classified into two categories—secured and unsecured loans. To avail of a secured loan, borrowers have to pledge a property against it. On the other hand, an unsecured loan does not require borrowers to pledge any collateral. Simply put, secured loans are backed by collateral while unsecured loans are not.

What is a Secured Loan?  

As the name suggests, a secured loan is availed by placing some type of tangible security with the lender such as real estate, vehicles, jewellery, securities and other similar assets of high monetary value as collateral.  

Due to their secured nature, these loans give you lower rates of interest and comfortable lending terms. This is because the collateral serves as reassurance of repayment and hence poses fewer risks to lenders. In the event that borrowers are unable to repay the loan at any time during the tenor, lenders have legal right to take possession of the collateral and recover the outstanding loan amount. However, before that, they will issue prior intimation to borrowers for settling the dues and to get EMI payments on track.

What is an Unsecured Loan?  

An unsecured loan is a type of credit that does not require you to place any security or collateral with the lender for borrowing the necessary funds. It usually has a higher rate of interest as compared to secured loans since it is not backed by security. Lenders sanction loans by weighing the borrower’s ability to repay the debt through in-depth appraisal of their personal and credit profiles.  

Apart from a sound bank account statement and strong CIBIL score, a steady source of income helps immensely in acquiring an unsecured loan. Lenders will look up your employment history as well as your monthly income in relation to existing debts and other commitments. This way, they can assess your financial position and capacity to support the loan repayments. 

Unsecured loans are a great funding option for people who are in need of quick financial assistance but have no valuable assets to pledge like property or gold. 

Differences Between Secured and Unsecured Loans 

Both secured and unsecured loans are distinctly different from each other in various respects due to the nature of granting credit. Some of the key differences include as follows: 

Secured vs Unsecured Loan: Which is Better?

There is no correct way to establish which of the two loan options: secured or unsecured loan makes for a better credit plan. Your choice of loan will largely depend on your specific borrowing requirement and repayment capacity over the given time frame.  

Opting for a secured loan or collateral loan may prove beneficial if you are trying to avail of higher loan amounts at relatively lower rates of interest. You can also enjoy a flexible loan tenor, which stretches your EMIs over a longer period while reducing the monthly instalment sum. 

As opposed to this, an unsecured loan would probably be ideal for individuals looking to borrow money but have no high-value security to pledge. In this context, a good CIBIL score, flawless credit history and a stable source of income aid smoother loan approvals.  

Types of Secured Loans and Unsecured Loans 

Mentioned below are different kinds of loans that one could benefit from. Here are some of the main types of secured loans: 

1. Home Loan 

A housing loan is specifically designed to help you buy or construct a new house or renovate an existing one. The property itself acts as collateral, which is why, lenders often extend loan amounts up to 90% of its market price provided other eligibility criteria are up to the mark.  

2. Loan Against Property

Also known as a property loan, this credit facility is offered against the pledge of a residential or commercial property. It has flexible end use and, therefore, allows individuals to address big-ticket requirements such as meeting housing expenses such as home renovation, and business-related needs such as business expansion, and debt consolidation. 

3. Car Loan

A car loan or auto loan specifically caters to borrowers who seek finances for a new car purchase. You will initially need to pay a certain sum of money as down payment while your lender finances the remaining cost.  

4. Gold Loan

Such loan options are extended against the valuation of pledged gold. Borrowers get it back once the loan is fully repaid. But if you default, the lender can repossess the gold for recovering the pending dues.  

5. Loan Against Securities

This includes loans against financial instruments such as equity shares, listed bonds, life insurance policies, debt and equity mutual funds, etc. The loan quantum depends on the value of instrument security. 

6. Loan Against Fixed Deposits

It is among the quickest and easiest ways to avail a loan, which may fetch around 85% of the FD amount, wherein interest is levied on the utilised principal only.

Now, we look at some prime examples of unsecured loans: 

1. Personal Loan 

Generally, personal loan amounts go up to Rs. 15 lakh, which may be used for varied purposes such as debt consolidation or other immediate expenditures. 

2. Education Loan 

This loan is meant for students who want to finance their higher education and living expenses in a college/university. In certain cases, a larger loan amount might require you to present some collateral.   

Conclusion 

Both secured and unsecured loans are uniquely positioned to cater to customer needs offering them requisite funding and benefits. Hence, check all possible options through reputed lenders and discuss your exact requirement with them. Visit their websites and compare the interest rates, eligibility, documentation and other criteria. Most importantly, before you go ahead, do a cost-benefit analysis using online tools like EMI calculators to get a better picture of your proposed loan.  

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