Loans are a financial tool offered by various financial institutes, to assist individuals in taking some expensive life decisions, by providing them with the necessary funds. The funds are given to borrowers in return for an interest rate charged by the lender. The borrower has to repay the loan amount along with the interest rate back to the lender in a speculated repayment tenure.
There are various loans like Home loans, car loans, personal loans, and many more. However, all these can be broadly divided into two categorized Secured and Unsecured loans. Here are a detailed overview of it.
What is a secured loan?
A loan that is backed by some security is known as a secured loan. The loan is given to the borrower after valuable asset like house, gold, car, land, etc has been pledged as collateral for the loan. The risk to the lender in the case of a secured loan is minimal because if the borrower defaults, the lender can see their pledged asset to repay the loan amount.
Read About: How to Choose Tech Support for Small Business
Some examples of secured loans are Home Loan, Car Loan, Loan Against Property, and many more.
Some features of a secured loan are:
- The eligibility criteria and qualification process are difficult.
- The borrowing limit is high.
- The interest rate is low and the repayment tenure is long.
- The monthly EMI is low ( you can check this on my online personal loan EMI calculator)
What are the advantages of Secured Loans?
- Secured loans provide a lot of benefits like:
- Due to lower risk, the inters charged is also loan.
- The borrower can take the loan for a longer tenure.
- If the loan EMI is repaid on time and consistently, then it can improve your credit score.
What are the disadvantages of Secured loans?
- In case the borrower defaults, the lender can sell the collateral to recover the loan money
- Defaulting on the loan can hamper the credit score of the borrower.
What is a secured loan?
Unlike a secured loan, an unsecured loan is not backed by any collateral like gold, home, land, etc. It poses a higher risk to the lenders, which is why they are offered at a higher interest rate to cover the risk.
Some of the common examples of unsecured loan options are credit card, personal line of credit, personal loan etc.
Features of Unsecured Loans
- The interest rate charged on an unsecured loan is high.
- The loan amount approved is lower than that of a secured loan.
Advantages of Unsecured Loans
- The eligibility criteria are simple and easy to meet.
- Timely repayment of the loan can help in improving the credit score.
- Freedom of using the loan amount for any purpose.
- If the borrower defaults, the lender cannot take your assets.
Disadvantages of Unsecured Loans
- Due to the high-interest rate, the repayment amount is much higher then the principal amount borrowed.
- The repayment schedules are shorter.
- Any missed payment can harm your credit score.
Differences Between Secured and unsecured loans
After careful analysis of each secured and unsecured loan type, let us look at the difference between the two.
- Security: A secured loan is connected to collateral like home, car etc. Whereas an unsecured loan is not protected by any security. The risk for the lender: The risk is higher in the case of an unsecured loan than in a secured loan for the lender.
- Loan Default: If the borrower defaults, in case of an unsecured loan, there is not much the lender can do, however in the case of a secured loan, the lender can pay off the asset pledged to repay for the loan.
- Loan terms: As far as the loan terms are considered, they are most lenient in a secured loan with a higher loan amount, lower interest rate, and longer repayment tenure.
Now that you are well aware of the difference between a secured and unsecured loan, based on your requirement, you can choose which one is the best option for you. Before you apply for any loan, make sure to check your credit score and the terms being offered by the lender. This will help you in making a wise decision about your finances.