How Secured Loans Are Different From Unsecured Loans

Every type of loan has its own USPs. Both secured and unsecured loans come with different features and serve different purposes. You should understand, analyze and assess both the options thoroughly, with reference to your requirement, before going for one.

There are instances in life when we all require some financial assistance at some point in our lives. We can avail a loan to fulfill those requirements. Loans make our lives easier by availing the whole amount at once and repaying it later in equated installments. Thus, it is necessary to understand all the aspects and features of a loan before availing one. Loans can further be categorized as the secured or unsecured loan.

A secured loan is a type of loan in which the borrower backs his application by a collateral security, whereas the unsecured loan is a type of loan in which his application is not backed by any security and is solely based on a borrower’s financial credibility.

Let us understand this by looking at some examples:

Secured Loan:

  • Loan against security
  • the gold loan
  • Home Loan
  • Car Loan, etc

Unsecured Loan:

Going further, we need to understand all the features of a loan along with the hidden terms and conditions before we go for a loan that suits our needs. It is important to have a complete understanding of the cost of borrowing and associated charges.

Now, let us have a look at these five important points that can help us decide between a secured and unsecured loan:

Loan Amount

The amount we require further gives us a clarity about the loan we should avail. Usually, the amount of an unsecured loan is based on our earning capacity, therefore we can’t exceed beyond a certain limit. In case of the secured loan, banks consider the collateral security to assess the maximum loan amount eligibility. So, preferably a secured loan can get us a higher loan amount requirement. If our loan requirement is high and significant, then it’s advised to go for a secured loan. On the contrary, for the small loan amount, we can prefer unsecured loan as there is no need of pledging a security and we can easily get a loan based on your creditability.

The rate of Interest and Charges

Everything stems down to the interest rate in the end. It is one of the most important factors that we consider while choosing between a secured and unsecured loan. Since an unsecured loan collateral free loan and it is totally based on the borrower’s credibility, so default risk is high, therefore bank normally charges a high rate of interest and processing fee. A secured loan is assured by a collateral security and if the borrower is unable to repay the loan, then banks have the option to recover money by liquidating the pledged asset. Therefore, interest on secured loans is comparatively lower than on unsecured loan. 

Period of Repayment

While availing a loan, the period of repayment is one of the biggest concerns. Usually, the unsecured loan has a low tenure in comparison with the tenure allowed under the secured loan. Under the unsecured loan, we can get a maximum loan tenure of around 5 years, whereas in case of a secured loan we can get loan tenure of as long as 25 years depending on the eligibility norms and other criteria. So, if we are availing a loan for a very long repayment period, then it is advised to go for a secured loan over an unsecured loan, provided we have a qualified asset to pledge with the bank.

Credit score

We must have a good credit score to avail a loan. Not paying the loan on time impacts the Credit Score drastically. However, as the secured loan can be recovered by liquidating the pledged collateral, but unsecured loan requires legal action to recover the amount, therefore a default in the payment of unsecured loan reflects for a long period on the credit report and it can significantly faulter the future borrowing capacity. 

Flexibility and Purpose

Flexibility and Purpose can help us determine the type of loan we would be availing according to our need. For example, we want to buy a home, and for that, we would want to borrow money from the bank or any financial institution. Now, for buying a home if we avail an Instant Personal Loan it will cost us very high interest due to high ROI, the repayment period will be very less, and we won’t get the flexibility to repay early. Similarly, if you want to buy a mobile on loan, then it would be a blunder if we pledge our home to get a loan against security and pay for the mobile.

So, our loan should match with our purpose and flexibility requirement, like a Personal Loan or a Credit Card EMI for buying a mobile, loan against the property for renovation or for a big fund requirement etc. For all type of instant Loans in Delhi you can Apply here .

Secured Vs Unsecured Loan

Features Secured Loan Unsecured Loan
The rate of Interest Normally low High
Availability Can be availed easily depending on borrower’s creditability and capacity to pledge collateral Mainly based on Good Credit Score and banking
Tenure Short to very long-term (5-25 years) Very short to medium term (1-7 years)
Loan Amount Also referred to as big size loan. The amount depends on the value of the pledged collateral Depends on the capacity of the borrower to repay the borrowed sum considering the income
By | 2018-06-18T09:26:19+00:00 May 19th, 2018|Blog|
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