Before taking out a loan, understanding the difference between a secured loan and an unsecured loan is critical to making an informed decision. Most banks/NBFCs offer both secured and unsecured loans. Without prior knowledge of each loan, usage may generate a dilemma in the mind of a borrower. You can overcome this confusion by understanding the characteristics of these loans.
Firstly, you should assess your financial situation, Personal Loan eligibility, and other relevant aspects before deciding to take a loan. Consider certain factors before choosing the best loan that suits your requirements.
Differences between A Secured Loan and Unsecured Loan
The Difference in Collateral
Secured loans are secured by an asset, such as an apartment, in the case of a mortgage. Similarly, a car, in the case of an auto loan, can act as an asset for securing such a loan. Such assets serve as collateral, enabling the borrower to seek a secured loan. On accepting the loan, you permit the lender to repossess the collateral if the loan is not repaid as agreed.
The same is untrue for an unsecured loan, which does not require collateral or a security deposit. Student loans are unsecured because an individual or student cannot use an asset to secure them. Using companies like Purefy, you can find the best private loans to suit your needs. Such a loan cannot be secured by assets that could be seized if repayment is not made. However, if you default, lenders can use other remedies, such as suing you and potentially claiming your wages.
The Difference in Interest Rates
As a matter of practice, secured loans usually charge lower interest rates than unsecured loans. Lenders are comparatively relaxed about secured loans because the collateral can be sold if the borrower defaults. Unsecured loans generally have a higher rate of interest because lenders consider them to be risky for their goal of earning profit.
The Difference in Loan Amounts
Depending on their eligibility, secured loans can enable borrowers to be approved for larger loan amounts. However, even if you qualify for a larger loan, you must still pick an affordable loan. Therefore, assessing factors such as Personal Loan eligibility and the ability to pay interest should be prioritized. Unsecured loans are usually less expensive than secured loans, but there exist exceptions to this notion.
How To Choose Between a secured loan and an unsecured loan
Various factors that must be analyzed before choosing between a secured loan and an unsecured loan include:
Value of Collateral in your Eyes
Collateral is the critical component that enables you to apply for a secured loan and get approved. Lenders may sometimes fix a minimum value or amount for collateral below which security will stand unacceptable. Further, the value of your security could be substantially higher than the loan amount that a lender offers. Keeping these issues in mind, you must decide rationally whether pledging security is suitable for you or not. If the value of the collateral is reasonable, as per your financial situation, you can opt for a secured loan.
Best Match for your Monetary Requirements
Secured loans can provide higher loan amounts with a flexible tenor to suit your requirements. However, unsecured loans depend on various eligibility terms, including your income and credit score, to get approved. Hence, the tenor and loan amount are shorter and restricted in comparison to a secured loan. Therefore, you must keep your monetary requirements and priorities in mind for selecting the correct type of loan.
Level of Urgency for Meeting your Requirements:
Unsecured loans can be accessed without delay to meet urgent or immediate requirements such as wedding expenses. This is because unsecured loans are collateral-free and can be easily applied on simple terms. Other examples of requirements that unsecured loans can fulfil include:
- Hospitalization costs
- Home repairs
- Home Appliances
- Funding urgent educational requirements
However, secured loans are the right fit for long-term requirements such as expanding a business. This is because higher funds for a longer tenure are usually needed for growing a business.
Understanding the difference between a secured and unsecured loan is the first step toward making an informed choice. Further, keeping the above-mentioned factors in mind can prevent you from making a disastrous financial decision. You must be financially aware to evaluate your requirements and assets before taking a loan.