Always prefer secured loan as compared to unsecured loan

Do you know why you should prefer a secured loan over an unsecured loan? 

There are many reasons why you should choose a secured loan. Secured loans are always cheaper than unsecured loans, so borrowers should prefer to avail themselves of a secured loan as compared to an unsecured loan. 

 We will tell you the reasons to choose secured loans over unsecured loans with some examples. Now, here we are giving a comparison between both the loans to make your understanding better. 

What are secured loans? 

These loans are secured by collateral, in which borrowers pledge their assets or property against the loan repayments. Secured loans can be backed by the mortgage of any immovable property, car, jewellry, shares, mutual funds, LIP etc. If you want to borrow a large amount of loan, a secured loan is the best option to choose, and you can easily get a large amount of loan with collateral. 

What are unsecured loans? 

Unsecured loans are not secure by any collateral, the example of these loans are student loans and personal loans. Lenders confirm your ability to repay by verifying your credit score, employment history, and references. 

Comparison of both types of loans  

• Unsecured loans are the reverse of secured loans. A secured loan requires borrowers to offer collateral, while an unsecured loan does not.
• Secured loans are always cheaper than unsecured loans because the interest rates are lower.
• The tenure of the secured loans is also more as compared to unsecured loans
• You can get a larger amount of loan with a secured loan but in the case of unsecured loan there are less chances.
• Secured loans have easier eligibility criteria in comparison to unsecured loans.

The secured loans are the most cost-effective, as lenders can offer better interest rates given reduced credit risk and availability of collateral security in case of potential default. MSMEs can offer a variety of properties like residential, commercial, manufacturing units as collateral.  

If MSMEs (Micro, Small, and Medium Enterprises) adopt unsecured with lower tenure it will adversely affect the cash flow of the business. Proper cash flow is the bloodline of the business. MSMEs need to understand the impact of wrong selection of loan products at business.  

Advice  

You may wonder why you should choose a secured loan. We know that it can be risky and if you fail to pay you may lose your assets. So, especially for MSME, this is advisable that they should opt for a secured loan. I am explaining the feature of a secured loan as compared to an unsecured loan with an example.  

Let's suppose MSME has a self-occupied residential property of the value of Rs. 200 lacs and they need a loan of Rs. 200 lacs. In this situation, if MSME adopts an unsecured loan for Rs. 200 lacs. The interest rate will be 18% approx. as compared to the secured loan rate of interest will be 9%.  

So, here we have seen that the total rate of interest difference is 9 %. and therefore, the total interest savings will be 18 lacs per annum when we calculate the whole amount. MSME can assume they are getting rent of 18 lacs per annum on self-occupied residential property. This will also help MSME to become financially strong. 

Apart from that there are general benefits also along with this. We have mentioned those in the following points.  

1. In this case, there are the high possibilities of getting a secured loan from banks as compared to unsecured loan.
2. In a secured loan tenure can go up to 15 years as compared to an unsecured loan. In an unsecured loan, tenure cannot be more than 3 years.
3. Even the loan processing fees are less on secured loans which are not more than 1 % as compared to unsecured loans. Normally loan processing fees on unsecured loan is 2 %.
4. Banks impose foreclosure charges on the loan amount. It can be 4% on unsecured loan but on secured loan generally it is upto 2% and even it can waive off by the bank after the period of three years.

Conclusion  

We can say by concluding that a secured loan should be your preference over the unsecured one while a MSME is availing a business loan. This helps MSMEs to maintain their cash flow as well as save money. Hence, it is sure that this advice will help you to manage your cash flow and business. 

You can also read our other blogs which contain the benefits for MSMEs.  

Author Bio

Name : Vikas Jain

Qualification : ca_practice 🎓

Company : Financeseva

Location : New Delhi, Delhi (DL), India

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