What’s the difference between a secured and an unsecured loan?
Secured loans are backed by assets一these are collaterals a borrower pledges as security to the bank against the issuance of a loan. For example, if you’re borrowing a loan for a car, the car can become the ‘asset’ in the process of sanctions. In case a borrower defaults on this kind of loan, their car would be seized and accepted as a repayment.
Some other examples of a secured loan are一home, gold loan, etc.
The rate of interest for a secured loan is low as compared to an unsecured loan.
The risk of default for secured loans is lesser.
An unsecured loan, just as the term suggests, does not have a liability attached to it. For example, if you need money to fund your education abroad, the loan taken would be considered unsecured.
In case a borrower defaults on this kind of loan, no asset is seized but their credit score is adversely affected. Some other examples of unsecured loans are一education, personal, business loans, credit cards, etc.
The rate of interest for an unsecured loan is high as compared to a secured loan.
The risk of default in unsecured loans is higher due to the lack of an asset.
Now that you’ve had an introduction to both the kinds of loans, let’s have a look at the pros and cons of each that a borrower should consider, case-by-case:
An unsecured loan is a better option if a borrower finds them in an urgent situation where they do not have a rainy day fund stowed away. The processing time for this kind of loan is shorter along with fewer documentation hassles and shorter tenure.
Secured loans usually take longer to be issued as the process for these requires legal compliance with added paperwork. Another time factor for this kind of loan is the tenure, which is longer (even as much as 30 years).
Secured loans will allow you to borrow more money with lower interest rates. These will, however, put your assets at risk. Unsecured loans are easier to procure given they are considered for a lower amount. But since the lender is taking a higher risk with such a loan, the interest rate is high and default can even result in legal action.
Secured loans provide higher negotiating power to the borrower due to their higher amount (and, security asset in question) and this privilege is granted seen for unsecured loans.
Even if you have a low credit score (the number between 300-900 that tells your creditworthiness), the presence of an asset can increase your chances of obtaining a secured loan. An unsecured loan is most likely to be sanctioned to borrowers with a high credit score. In events when a low credit score is issued a loan, note that the rate of interest shoots up much more. The result of a default on an unsecured loan would also mean that the borrower’s cibil scores (the same as credit score) go down一making future borrowing difficult.
Both secured and unsecured loans can bring you closer to your financial dreams. Whatever you choose, choose wisely.
Higher risk = higher interest.
Secured loans are issued with an asset.
Unsecured loans require no asset.
Unsecured loans can be sanctioned in a short span of time or in emergency situations.
Secured loans have a longer tenure with the possibility of a bigger amount.
Both secured and unsecured loans have risks and their set of consequences as loss of possession and bad credit score respectively.