Difference Between Secured Loan vs Unsecured Loans

Are you looking for money? Most probably an individual goes with a personal loan when it comes to a loan, but the truth is there are several other loan options available that are categorized under the 2 major types of loans, namely secured loans and unsecured loans.  

Let us understand with an example to differentiate them better; Might the personal loan process be quick & disbursement takes within 6 working days but what about the interest rate? Personal loan interest rates are high as compared to secured loans. If possible, you can pledge your collateral as a secured & get a loan at lower rates.   

What is a Secured Loan?  

A secured loan requires the borrower to pledge collateral or security to avail loan. Home loans and car loans are some of the most common examples of secured loans in which borrowers will be asked to pledge a house or vehicle then it becomes a secured debt for lenders.  

Banks & financial institutions will hold the ownership deed of security until the borrowed loan amount is paid off. It’s the best way to secure a high loan amount. One of the biggest advantages of opting for secured loans comes with lower interest rates as compared to unsecured Ones.  

What is an Unsecured Loan?  

Unlike secured , Unsecured loans do not ask for collateral or assets. Applicants who opt for unsecured are considered to be riskier profile and the interest rate is higher than secured ones. Only based on the financial status of the applicant, lenders evaluate repayment capability by assessing his/her creditworthiness.    

Difference Between Secured Loan vs Unsecured Loans  

Pros and cons of Secured Loans  

Pros  

• The lender will offer a higher borrowing limit that allows to avail higher sum of amount.
• You would pay a nominal interest rate on the borrowed loan.
• A loan can be availed for a longer repayment period.

Cons  

• Chances of losing your collateral might occur if borrowers do not pay attention to repayment.
• Longer repayment may result in higher interest payable over the loan tenure.
• Floating interest rates would be led to pay higher repayment

Pros and cons of Unsecured Loans  

Pros  

• The lender does not ask for collateral or security
• Loan processing is 5 times better than secured loans
• The loan is sanctioned based on income parameters & credit history

Cons  

• Comparatively interest rates are higher as compared to an secured one.
• If the borrower has a low credit score, the possibility of a loan is reduced.
• You can expect a loan for shorter periods which means default on payment increases

Thus, secured loan and unsecured loan both have their pros & cons, depending on the borrower's requirements, you can make your own choice.  

Is Unsecured Loan better than a Secured Loan?   

Unsecured loans are a good option for urgent or short-term needs. These loans are much easier to obtain & quicker to disburse but impose a higher interest rate which may result in EMIs burden or led to payment default while secured come with low rates and are available for longer repayment tenure allowing borrowers to pay more affordable EMIs & improve credit score effectively.  

However, every lender prefers funding to secured loans over unsecured loans as they are less risky. 

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