The beauty of life remains in its unpredictability. Do you agree to this? Me too!
But, due to this unpredictable nature of life, it often throws situations that you did not plan to happen. You are struck with exigencies, and suddenly you may require huge funds. It would have been a cause of concern for individuals in earlier times, but not anymore, particularly when you have easily available personal loans to your rescue.
You may be aware that personal loans are categorized into Secured and Unsecured Loans, and they differ depending on various parameters. But before going into the differences, let’s discuss in brief about both these loan types-
What are secured loans?
As indicated by the name, the lender asks for some security or collateral while processing secured loans. The security/collateral should bear a value equal to or more than the amount you want to borrow. With this, the lender asks for protection from a possible loss he may incur if you fail to repay the borrowed amount tomorrow.
What are Unsecured Loans?
When you apply for personal loan, there is no need to pledge a security /collateral. Your perceived creditworthiness is all when it comes to the assurance the lender would get regarding the loan repayment in the future.
Two types of unsecured personal loans exist-
- Revolving personal loan– This personal loans act similar to credit cards which can be obtained, repaid and can be used again.
- Term personal loan-These personal loans are disbursed for a specific time period and with a pre-defined amount. Students can also avail these loans.
Essential differences between secured and unsecured loans
Here we will look at 6 striking differences between Secured and Unsecured Loans
- The need of security/collateral– In a secured loan, the borrower needs to keep collateral or an asset as a security with the lender. But, he does not need to pledge any security or collateral while availing an unsecured personal loan.
- Rate of interest– As security is provided to cover for the perceived risk, banks/NBFCs usually keep the interest rate on the lower side for secured loans. But, when it comes to the unsecured loan, no security is provided,and the loan is unprotected for the lender. As a result, the rate of interest for unsecured loans is a bit higher as compared to secured loans.
- Limitation in usage– There is a limitation while using a secured personal loan. For example, if you have availed a secured loan to buy a housed property or a piece of land, you cannot use the amount for any other purpose. However, there is no such limitation with an unsecured loan. You can use the fund to meet any of your genuine needs.
- Repayment period– In general, the secured loans have a more extended repayment period. On the contrary, unsecured loans are not usually offered for an extended repayment period.
- Approval time and documentation required– A borrower may find secure loans easy to obtain with less approval time once the necessary documents are submitted. But such loans often come with lengthy paperwork and the borrower needs to furnish many documents related to the security provided.
As there is no asset to protect an unsecured loan, the documentation is comparatively less in this case. But, the lenders may require little longer to approve unsecured loans.
- Compulsion on the borrower– Secured loans need the borrower to pledge collateral. In case he fails to repay the loan, the lender has the absolute right to seize the asset and recover the money.
No such compulsion is attached to the borrower in case of an unsecured loan. However, in case of a default, the credit score of the borrower takes a beating, and he will have a tough time in getting even a secured loan in the future.
Which one is perfect for you, secured or unsecured loans?
The answer to this all-important question depends upon factors such as the loan amount you require and your credit score.
A secured loan may serve you better if you need a more substantial sum of money as you are more likely to get a better interest rate. This is for the simple reason that your lender is more confident to lend money to you. The security/collateral you pledge gives them the confidence that they will not lose money in case you can’t repay the loan tomorrow. However, the only compulsion you have in this type of a loan is that you need to put your property in risk if you fail to repay the loan.
You do not need to put your property in any risk with unsecured loans. However, these loans are comparatively harder to get approved and are often offered with higher interest rates and shorter loan terms. Therefore, if you need a larger sum of money, you may end up paying more in interest and bigger EMIs in case of an unsecured loan.
It is always better not to go for a secured personal loan if there is any chance of default on your end. In secured loans, there are possibilities where you might lose your mortgage if you fail to repay your loan. However, unsecured loans come with few default consequences if you fail to repay the loan. Since you do not have to provide any mortgage for an unsecured personal loan, you are at less risk as a borrower. The lender can’t take anything away from you. It’s another matter that, they might sue you for not repaying the loan amount on time.
In conclusion, we would like to say that both these types of loans come with their fair share of benefits and drawbacks. However, it depends on the person what kind of loan he/she wishes to apply for. One needs to do a complete analysis of the repayment period, interest rates, and other fees charged by the lender before using for either type of loans.