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.
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.
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.
|Secured Loan||Unsecured Loans|
|Lenders want you to pledge collateral or asset||Lenders do not ask for any collateral or asset|
|Due to the presence of collateral, lenders take a long time as it includes more paperwork & evaluation process||Do not require much paperwork or evaluation process, hence the processing is 5 times faster|
|Eligibility based on the value of an asset, income parameter & other existing loan histories if applicable||Eligibility based on borrower income parameter, employment type, credit history & other existing loan histories if applicable|
|Comparatively lower interest rate||Comparatively higher interest rate|
|The loan can be availed on average or low credit score||The loan can be availed only on a higher credit score|
|Best for long-term requirement||Best for short-term requirement|
Thus, secured loan and unsecured loan both have their pros & cons, depending on the borrower's requirements, you can make your own choice.
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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