You might have received messages regarding secured and unsecured loan offerings on your phone, attractive interest rates, or messages promising an instant loan from a particular lender. But only a few of us understand the fundamental differences between these loans. However, knowing the difference between the secured and unsecured loan is an important step towards achieving financial literacy and can help you at times when you are in a financial crunch and need to avail of any of these loans.
Secured Vs Unsecured loan
Secured loans need collateral as a guarantee against the lent money. The collateral can be any of the assets that belong to the borrower or it can also be fixed deposits and provident funds in some cases. This collateral is kept by the lender during the entire repayment tenure. In case the borrower fails to repay the loan in a fixed period of time, the ownership of the collateral is taken by the lender to recover the loan amount. Some of the examples for a secured loan are mortgage loans, home loans and gold loans.
Whereas Unsecured loans do not require any collateral or security. These loans are approved and disbursed based on the borrower’s repayment capacity and debt to income ratio. However, the creditworthiness of the borrower is determined by their current income. The best example of an unsecured loan is online personal loans, instant loans and same day loans.
|Secured Loans||Unsecured Loans|
|You need to give collateral to avail this loan.||No collateral is required.|
|Processing wise it can take some time.||These are quick and instant loans.|
|Secured loans have low interest rates.||You need to pay comparatively higher rate of interest for unsecured loans|
|Secured Loans have higher borrowing limits.||Unsecured loans have lower borrowing limit|
|The ownership of the asset which is given as collateral is at risk.||No risk is involved.|
|The loan amount approval is generally 70% of the asset value which is given as collateral.||The loan amount approval depends on your repayment capacity (income)|
Which loan is best for you?
If you are in need of money and want to apply for a loan, you need to ensure that you are well aware of both secured as well as an unsecured loan. You need to make the right choice depending on your requirements, affordability and needs. So, here are a few to help you choose the best loan for you.
- Your ability to provide collateral/guarantee: If you are looking for a bigger loan amount and you have assets say, land or any property which you can give as collateral then you can go with a secured loan as you will you able to get the desired amount that too at a lower interest rate. Whereas in case you are unable to provide collateral or securities, you can avail an unsecured personal loan or instant loan if looking for instant funding.
- The loan amount that you need: For small loan amounts you can anytime approach to online lenders and can avail an online personal loan, the instant loan or same day loan. This is the best option as there are no restrictions on the end-use of money plus you can avail it online from the comfort of your home. In case you need a bigger loan amount and you are not eligible for instant personal loans than in that case you have to go for a secured loan.
- The time frame within which you need money: Unsecured loans are collateral-free and are processed fast, as a result, you can get approved for this loan within hours only. This makes unsecured personal loans as the best option for those who are looking for quick or emergency funding. Whereas if you need funds for a planned expense and the requirement is under 7 to 10 days then you can go with secured loans.
Whether you go for a secured loan or an unsecured loan like a personal loan, it is important to choose one that suits your requirement and which has the potential to fulfil them. Both secured and unsecured loans have different offerings and features. Understanding both loans is very important as it helps you to choose the best one for you. However, don’t forget to analyse your repayment capacity and affordability before applying for any of the loans.