Most of us know what a loan is and the benefits of the same. Also we all are smart to check if the loan we are availed with is the best one that suits our requirements. However, here is another way of saving some extra money. There are basically two types of loans, secured and unsecured loans. A loan that is backed up with security is called as secured loan. Most of the loans used for purchase of automobiles and houses are secured loans. The security should be in the form of an asset. It can either be movable or immovable asset. Banks will hold the title on this asset until the loan is repaid.
On the other side unsecured loans are rendered at the basis of credit worthiness of the borrower. If the borrow has good credit rating and proves to have the ability to repay loan, then based on this information banks will render loan. But the rate of interest on such loans is higher as compared to secured loans. The reason for this is banks hold higher risk of default in case of unsecured loans. However, on secured loans, the chances of default are very low and banks can make use of the security asset to compensate for the loss.
Differences between Secured and Unsecured Loans:
Here are some of the differences between secured and unsecured loans. These will help you in understanding which is better while considering of any types of loans:
- Credit Requirements:
Even though an applicant is not qualified of getting an unsecured loan, there are chances of getting secured loans. The reason for this is reliability on the security deposit. As more importance is given to the security factor, even if the credit worthiness or credit rating is lower than the limit, there are high chances of getting secured loans.
- Rate of Interest:
The better borrowers’ credit rating is; lower will be the rate of interest. Apart from these it is possible to get much lower interest rate loans if you have a secured loan. As the level of risk is low on secured loans, the rate of interest is also low. If you have an asset to pledge as security deposit, then it is advisable to make use of this option to have reduced rate of interest on the loan amount. This will not just help you to spend less on EMI but on the long term can turn out to be a huge savings.
- Availability of Loan:
The chance of getting unsecured loans is low. Most banks prefer offering secured loans. This is the best and safe way for banks to lend. Even through direct banks and online application preference is always given to secured loans over unsecured loans. It can also be said that secured loans are available most commonly than unsecured ones.
As the rate of interest on secured loans is low, it makes affordable among small borrowers. Not everyone will have huge income to repay the loan amount through high monthly installments, in such cases secured loan are considered and are affordable by small income earners. Again based on the requirement of the loan amount, secured loans affordability is convenient.
Secured loans will be offered for longer tenure. This is at the basis of risk factor. As there is less risk of defaults, banks will be ready to offer loan for low interest rates for longer period of time. The spread of secured loans is usually longer until the borrowers prefers otherwise.
- Huge Amounts:
Lenders will have the surety that the loan amount will be repaid by the borrowers as there asset is in lenders custody. This confidence promotes the lender to offer high amounts as loan. In any case all banks will offer loan to the maximum of 60% of the asset value.
These are the reasons why secured loans are considered lighter on pockets. However, irrespective of all the benefits available on secured loans, it is advisable to take loan only to the extent of what the requirement is. And always take time to investigate every aspect before making any decision. Go through the bank specific terms and conditions and accordingly finalize the loan type, bank, loan and EMI amount. Clarify all your doubts before signing the contract with banks.
There are plenty options available in India for loan, thus spend time to find the best or make use of Finance Buddha to get all necessary information.