What s the Difference between a Secured and Unsecured Personal LoanLoans are of two different categories, namely, secured loans and unsecured loans. Personal Loans fall in the category of unsecured loans. It is important to understand the difference between the two loan terms, so as to choose the best viable option as a borrower, which could impact your long-term financial health.
A secured loan is granted to borrowers on the basis of some form of collateral, while an unsecured loan, including personal loans, implies a collateral free loan. This basic difference in the two types of loans impacts the rate of interest, borrowing limit, and terms of repayment of such loans.
So, lets understand the difference between secured and unsecured loan to help us understand not only the differences but also to make the most suitable choice while applying for a loan.
A secured loan pertains to loan granted by financial institutions against an asset which is used as a security or collateral towards the loan. For instance, the financial institution will hold the ownership/title deed of your house, stocks etc. as security; for availing loan corresponding to the value of the asset, till the loan is repaid fully. They are the most popular method for borrowing huge sum of money. With borrower’s pledge asset against loan availed, financial institutions are assured of the timely repayment of the loans granted. In case of default by the borrower, the lender can sell the security granted against the loan to pay off the loan, thus mitigating the risk of default.
Typical examples for which secured loans are granted are:
- Loan against property
- Home loan
- Vehicle loan
Unsecured LoanUnsecured loan relates to a loan that is granted without the need for borrowers to pledge any asset like gold, house etc. i.e., it is a collateral free loan. Compared to a secured loan, unsecured loans carry more risk for a financial institution granting the loan, so they have a higher rate of interest.
Unsecured Loans are normally granted as:
- Personal Loans
- Credit Cards
- Student loans
Personal loans are a popular kind of unsecured loans, which are provided by financial institutions for meeting their urgent financial requirements. Personal loans can be availed for various reasons like education, marriage, health, travel etc. Personal loans are granted after verifying the credit history and income status of the individuals to evaluate the past credit history and potential repaying capacity of the borrower.
What is the difference between secured loan and unsecured personal loan?
- The main difference pertains to requirement of a collateral in secured loan. Unsecured personal loans are collateral free loans.
- Unsecured personal loans have higher rate of interest as compared to secured loans due to the collateral free nature of unsecured loans. Also, personal loans carry more risk for the lender than secured loans.
- Secured loans can be easily obtained while unsecured loans have multiple formalities due to the higher risk factor associated. Institutions are very careful while granting unsecured personal loans, and do so after evaluating the borrower’s creditworthiness and financial status, to assess their repayment capacity.
- Secured loans have a longer repayment tenure whereas unsecured personal loans are of a shorter term. This is due to the fact that secured loans are granted against security so financial institutions are backed by the borrower’s assets in case of default by the borrower.
- Unsecured personal loans can be taken for fulfilling various urgent financial needs of the borrower like marriage loan, education loan, travel loan etc. whereas secured are granted only towards a specific purpose like loans against property, house etc.
So, which is better secured loan or unsecured personal loan?
That would depend on the purpose for which a borrower is taking the loan.
If it is for a specific purpose and borrower has assets to pledge against the loan, then he can opt for a secured loan. Otherwise, can opt for unsecured personal loans.
Simply Cash, a venture by HeroFinCorp is one such user-friendly and fully digitized online personal loan app, which can be downloaded through Google Play Store. Here, you can get instant personal loans starting from Rs. 15,000 up to a maximum limit of Rs,1,50,000 in just a few clicks.