When it comes to borrowing money, most people generally prefer taking a personal loan from banks or financial institutions. In the case of personal loans, the processing is generally quick, and you could easily get the money in just a few days. But what if you could get a loan at a lower rate of interest than a personal loan just by pledging any of the assets you own? Though the approval may take much longer than a personal loan and might also involve more documentation. Such loans are called Secured loans, while personal loans are unsecured loans.
A secured loan is typically a better option than an unsecured loan as it has easier eligibility criteria, a lower rate of interest and allows you to borrow a higher amount of money. The only drawback of secured loans is that the moneylender, i.e. banks or financial institutions, can repossess your real estate or asset in case of default.
When you are on the journey of borrowing money, you will have to decide whether to opt for a secured or unsecured loan. If you are wondering about the difference between secured and unsecured loans, we are here to help you. In this post, read and find the differences between Secured and Unsecured loans. Also, we will offer you a few tips on how to choose the right type of loan amongst them.
Let’s start with the meaning first, and then we will move forward to the differences between them!
What is a Secured Loan?
A secured loan is a kind of loan that is connected to collateral. Collateral here refers to something of value as a car, house or equity shares. The moneylender, i.e. banks or financial institutions, has the complete right to take possession of the collateral if you fail or default to pay back the loan as agreed. Some of the common examples of secured loans are mortgage loans and car loans.
Even though the money lenders repossess the collateralised property, you might still end up owing money to them in some situations. The lender will sell the real estate and use the funds generated to square off the debt. Now, in case the market value of the property turns out to be less than the outstanding amount of the loan, you will be required to pay the remaining amount out of your pocket.
What is an Unsecured Loan?
An unsecured loan is a loan that is not connected to collateral. If you default on such a loan, the moneylender can not automatically take possession of your real estate to repay the same. Student pans, credit cards and small unsecured personal loans are a few common examples of this kind of loan. Personal loans without collateral are also broadly available. You typically require a stable income and a good credit history to get an unsecured loan.
Such types of loans are given on the basis of your credit score and income and involve options like student loans and personal loans. Your timely repayment of credit in the past, having a steady job, and filing tax returns on time are top factors that usually render you eligible for an unsecured loan. It’s important to note that unsecured loans come with a higher rate of interest and processing fees as the moneylender, in such cases, takes on higher risk as compared to secured loans.
Difference Between Secured and Unsecured Loans
The differences between secured and unsecured loans are as follows:
1. Amount of Loan: In the case of a secured loan, the loan amount that a borrower gets is high. Whereas, in the case of an unsecured loan, the loan amount is less.
2. Tenure: The repayment tenure for secured loans ranges between 15 to 30 years. On the other hand, the repayment tenure for unsecured loans is up to 5 years.
3. Collateral: Collateral is required in case of a secured loan. In contrast, no collateral is required in the case of an unsecured loan.
4. Rate of interest: Secured loans involve a low rate of interest, whereas unsecured loans involve a high rate of interest because, in the case of unsecured loans, the borrower takes on increased risk.
5. Documentation: More documents are required in case of a secured loan as it involves collateral. On the other hand, fewer documents are required in the case of unsecured loans as no collateral is involved in this case.
6. Speed of disbursement: The speed of disbursement is slower in the case of secured loans. In contrast, unsecured loans are disbursed very quickly.
7. Examples: The top examples of secured loans are loans against property, home loans, car loans etc. In comparison, the top example of unsecured loans involves a personal loan, unsecured business loans, credit card purchases etc.
How to Choose Between Secured and Unsecured Loan?
If you are confused regarding how to choose between secured and unsecured loans, then here is a list of factors to consider:
1. Your comfort level with collateral
2. Your monetary requirements
3. Your timeline for meeting your financial needs
4. Your credit score
In the end, we would like to inform you that, before you take out a loan, whether it's secured or unsecured, make sure to have a clear payoff plan beforehand. As a general rule of thumb, only borrow what you know you really need and can afford to repay. Also, make sure you are pretty much comfortable with the repayment tenure. Just because you can get a loan does not mean that you should. So, it’s advisable to take time and do deep research before you sign on that dotted line.
Also read: Important Points You Should Know Before Applying for a Home Loan