Secured and unsecured loans are two of the most fundamental types of loans. All other loans come under these two categories. The first decision that you would have to make before taking any loan will be if you want to take one that is secured or unsecured.
What is a secured loan?
A secured loan is a kind of loan that is usually protected by collateral of some sort. When you are using the money to buy an object, the object is typically the collateral. For example, if you are taking a Home Loan or a car loan, then the home or the car is used as collateral. The bank holds the deed for that object until the loan along with any applicable fees and interest is paid off. There are also other items, such as, personal properties, bonds, jewellery, and stocks that you can use as security.
In theory, a secured loan would be the best way to borrow a large sum of money. A finance company or a bank will only give you a significant amount if they have some sort of assurance that they would be getting their money back.
As Home Loans are usually for a large sum of money the financial companies or banks also check your credit score to verify your Home Loan eligibility when you apply for a home loan. There are also many lenders that would prefer to give you a Loan Against Property as that would ensure that they get their money on time as you would do everything in your power to pay back the loan and get your property back. Therefore, property loan interest rates are lower than unsecured loans.
A secured loan is usually given at a much lower interest rate as well as higher borrowing limit as there is a lower risk for the banks. The period in which you must pay back the loan is also longer. A few examples of secured loans are:
- Home loans
- Loan against property
- Home loan balance transfer
- Recreational vehicle loans
- Auto/car loans
- A home equity line of interest
- Gold loans
- Secured business loan
What are unsecured loans?
Unsecured loans are just the opposite of a secured loan. In this kind of credit, the lenders take higher risks as they are giving you a loan with no collateral. They would not be able to claim any of your property or assets if you ever default on the loan. This also means that interest rates for this loan are higher, and the period in which you would have to pay back the loan is also shorter. If you have applied for an unsecured loan and were rejected, there are chances that you would be eligible for a secured loan if you can provide something of value as collateral.
A few examples of unsecured loans are:
- Credit cards
- Personal loans
- Student loans
- Unsecured business loans
When you Apply for a Personal Loan or any other kind of unsecured loan, the lender would have to be sure that you will be able to repay the loan. They would consider your financial background and your income before you are eligible for an unsecured loan. The five primary ‘Cs’ of credit are:
The first four aspects depend on how willing the borrower is to repay the loan and if they can do so. The last factor assesses the borrowers’ general economic situation.
The application process for an unsecured loan is usually shorter. You can also get great deals for Personal Loans online so you wouldn’t even have to go to the institute to apply for the loan.
Difference between secured and unsecured loans:
|Basis of comparison||Unsecured loan||Secured loan|
|Definition||A loan in which no asset needs to be kept as collateral||A loan that is secured by retaining some asset as collateral|
|Risk of loss for banks||High||Low|
|Penalty in case the borrower does not pay||Can sue the borrower for that amount||Loss of the asset|
|Expense||Expensive as the rate of interest is higher||Not expensive as the rate of interest is relatively lower|
|Limit of borrowing||Less than secured loans||Much higher than unsecured loans|
|Basis of eligibility||Creditworthiness||Collateral|
Why are secured loans better?
Although you risk the loss of your property if you do not pay back your secured loan it is much better to opt for a loan that is secured rather than one that is unsecured. The application process for a guaranteed loan is much more accessible as you would be providing collateral to the bank and hence they are more likely to give you the loan.
It takes only a few days for the loan to be sanctioned if you Apply for a Loan Against Property. Also, you are also able to get a higher loan amount as compared to an unsecured loan. The interest rates, as well as the processing fees, are often lower in the case of a secured loan hence choosing to apply for a guaranteed loan is also cheaper than that an unsecured loan.
Although an unsecured loan may look good as fast money, in the long run, a secured loan is better as it is cheaper and lets you borrow a higher amount for a longer period.
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