There are two main types of loans offered by the lenders. While one is a secured loan and the other is an unsecured loan. The basic difference between the two is that a secured loan needs you to submit collateral or security, and an unsecured loan does not. Therefore, these two loans differ in interest rates, borrowing limits, repayment terms, and more. It is important to understand these two loans in detail to make an informed choice and enhance your financial literacy.
What is a Secured Loan?
As mentioned earlier, a secured loan is when you pledge an asset to the bank for getting a loan in return. The asset can be an expensive item purchased against the loan, a property like a home or office, a car, a bank account, etc. Sometimes, the collateral includes insurance policies, mutual funds, stocks, and bonds.
Secured loans are a popular loan type where the lenders are at low-risk of default. If the borrower defaults on the loan amount, the lender can keep the asset or collateral. You can borrow large amounts of money using a secured loan, according to the lender’s maximum loan amount policy. However, you must ensure to repay the full loan sum within the agreed timeline.
Features of a Secured Loan:
Listing all the things you need to know about a secured loan:
- Since these loans protect the lenders’ money due to the collateral deposited, the interest rate on this loan is less.
- Using a secured loan, you can take a loan of a higher amount. This is because the lender can seize the collateral to recover the money in case of default.
- This kind of loan also promises a longer repayment term, as the lender is more confident of the repayment in secured loans.
- This loan might take some time to get processed as the lender takes time to assess the value of the collateral.
- These protected loans are easier to qualify for.
Type of a Secured Loan
The examples include:
Mortgage or a Home Loan
In a secured home loan, the borrower needs to deposit security. Then, the bank will provide funds to the borrower to buy a home. You will have to repay the monthly dues consisting of the principal amount and interest.
Secured Credit Cards
Not all credit cards are unsecured. You can take a secured credit card also.
Home Equity or a Loan Against Property
It may also interest you to know that a secured loan is not just taken for making a new purchase like a home or car. Some borrowers take secured home equity or loans against property, according to the present home valuation. In these loans, the collateral is your home.
Car Loan
If you want to finance your car, then you will have to submit collateral and receive the funds from the bank or financial institution as a secured loan.
Business Loan
All the entrepreneurs who are looking forward to starting a business can apply for a business loan using a secured loan option.
What is an Unsecured Loan?
Unsecured loans do not need the borrowers to deposit any security to get the funds from the lenders. Since the lenders are at more risk in this type of loan due to the absence of the asset or collateral, the interest rates are higher. However, in the case of an unsecured loan, there is greater importance on your credit score. While you do pledge a property or stocks and bonds, you should have a good credit score to obtain the loan amount. If you don’t have a good credit repayment past, the lender might not approve your unsecured credit application. In this situation, you can go for secured loans, provided you have collateral.
An unsecured lender also judges you on factors like income, job stability, employment history, references, outstanding debt, funds available in your bank account, investments, etc. Considering all these aspects, the lender assesses the borrower’s ability to repay the loan amount.
Features of the Unsecured Loan
Jotting down all the things you need to know about an unsecured loan:
- Since these loans do not protect the lenders’ money as there is no collateral deposited, the interest rate on this loan is high.
- An unsecured loan does not fetch you a loan of a higher amount. This is because if the borrower is unable to pay the loan amount, the lender will suffer the loss and can hardly recover the money.
- This kind of loan has a limited repayment term, not more than seven years. This is because the lender does not want to risk the loan amount for a long period.
- This loan is faster to get as the lender need not assess the collateral.
Types of an Unsecured Loan
Here are some of the top unsecured loan products:
Credit Cards
Credit cards are a popular line of credit where the borrower is allowed to make purchases without using cash or real money. They make the payment using the card. The repayment amount is made to the credit card issuer.
Personal Loans
One of the most popular types of unsecured loans, you can take unsecured personal loans online to fulfill a personal objective like home renovation, vacation or trip, buying jewelry, starting a business, etc.
Business loans
You can also take unsecured business loans. For this type of loan, you don’t need to deposit a collateral.
Personal Credit Lines
You can also go for a personal line of credit for buying anything you need. You need to pay the interest on the amount spent.
Student Loans
Student loans are also unsecured loans, where the individual pays the loan back after the college education.
Wrapping Up
The banks and financial institutions in India offer both secured and unsecured loans with different loan terms. You can choose one depending on your preference and loan requirements. If you want to buy a property, you should go for a secured loan as it is cheaper, and you have the property as collateral. For fulfilling your personal goals like a family vacation, you can take an unsecured loan and repay the same within the asked timeline.
FAQs
1. What are the benefits of a secured loan?
Ans. The benefits of secured include easy to qualify, low interest rate, offers a loan of a higher amount, promises a longer repayment term, etc.
2. What are the benefits of an unsecured loan?
Ans. The unsecured loan offers advantages like not needing collateral, faster processing time, and more.
3. What are the examples of a secured loan?
Ans. Examples of secured loans include home loans, car loans, business loans, home equity or a loan against property, etc.
4. What are the examples of an unsecured loan?
Ans. Examples of unsecured loans include personal loans, credit cards, student loans, loans against lines of credit, unsecured business loan for startup, etc.
5. What happens when you do not pay a secured loan?
Ans. If the borrower does not pay the secured loan amount, the lender can seize the asset to recover the loss amount.
6. What happens when you do not pay an unsecured loan?
Ans. Since there is no collateral that the lender can seize to recover the loan amount, it can bring your credit score down substantially. It will become tough to obtain loans in the future.