Borrowing a secured loan requires you to provide collateral in the form of property to the bank. In the case of unsecured loans, you can borrow as much as you want but at higher interest rates.
For instance, a personal loan is an unsecured loan. Borrowing money for credit card, educational loan or lease of a property, are all considered as unsecured loans.
There are differences between the two concepts. So, a clear understanding of the purpose for which you need a loan, would help. One of the first questions that you need to ask is –
What is secured loan and unsecured loan?
Secured loans are those where you can borrow a sum of money against a property, like your house or car. This ensures that if you default, the bank can mitigate the loss by using your collateral.
For this very reason, secured loans have lower interest rates since the banks have a guarantee. They’re also a lot less risky when compared to unsecured loans.
The duration for which you can take a secured loan is also higher because of the collateral. Secured loan examples can show that borrowers will make payments on time. If you miss few of your payment over a course of time, the value of your asset is liquidated to make for the loss.
Types of secured loans include auto loan, educational loan, home improvement loan etc.
Unsecured loans require you to have a good credit history to determine eligibility. A good credit history means you have a healthy amount in your bank account and you haven’t defaulted in any prior loans and bills.
Determining a healthy credit score happens by checking your CIBIL score. If the applicant has a score higher than 750, they’d be highly considered for the loan.
Unsecured Personal loans are the best examples of unsecured loans. There’s no upper limit, but the duration has a limitation. Also, since the lenders don’t have security, the interest rates tend to be high.
But since the sanction of unsecured loans are quicker, it can be easy to get them for your financial needs.
The main differences between secured and unsecured loans the two concepts are:
Requirement of Collateral
In the case of secured loans, you’d need to give an asset as collateral to the lender. This would be liquidated if you miss payments regularly or default.
Unsecured loans don’t require any collateral and have less processing time. They’re high risk loans since banks don’t have any collateral against your loan. In case of a default, you credit rating would crash. That makes you ineligible for future loans.
Secured loans have lower interest rates since they come with a higher duration. The lender has the safety of a collateral, so they can give you a high amount on loan as well.
In the case of unsecured loans, you’d be charged high interest rates. This is to safeguard your lender’s interests with yours.
You can opt for secured loan to build credit. Since you’ve put up a collateral, make sure you make payments on time. This way, you can build a good credit rating to borrow unsecured loans in future.
An unsecured loan needs you to have a history of good credit score. Also, you should have a regular healthy balance to ensure that you can repay the loan on time.