Difference Between Secured Loan and Unsecured Loan

A Loan sometimes becomes a confusing thing for a normal person who is not associated with banks or such things. This article is a step to enhance your financial knowledge by telling you about the difference between secured and unsecured loans. Let's initiate with what is a loan and then proceed with what is an unsecured loan and secured loan. A Loan is a financial aid that is given to the eligible borrowers. In return, the borrower must repay the loan amount with additional interest. The interest rate depends primarily on the type of loan that a borrower is opting for from a lender. Usually, the interest rate of an unsecured loan is lower than that of a secured loan.

Now let's start with the difference between a secured loan and an unsecured loan.

What is a Secured Loan?

A Secured Loan is given by financial institutions like banks, and NBFCs wherein an asset is used as collateral for the security. A secured loan is a one-stop solution for quenching financial thirst and making wiser financial decisions. It is offered at an interest rate on longer tenure. The banks, NBFCs will hold the ownership of the asset which is serving as collateral till the end of the loan period. This type of loan is a good option for a person with a low credit score. In addition to this, a secured loan is a safe option as your collateral will be pledged as security.

Mentioned below are the secured loan types that the borrower can apply to satisfy financial needs.

Major types of Secured Loans are mentioned below:

• Home Loan

• Loan Against Property

• Working capital Limit

• Home Loan Balance Transfer.

• Vehicle loans

What is an Unsecured Loan?

A type of loan that does not require any asset to be presented as collateral. This type of loan relies on the borrower's creditworthiness and is known as a signature loan. Usually, an unsecured loan offers a higher rate of interest as compared to a secured loan. This is more riskier form of loan that is offered by banks, and NBFCs with perks like minimal documentation, and quick disbursal. The lender assesses the financial status and checks whether the borrower will be able to repay the loan.

The unsecured loans can be approved with KYC documents, financial details, and a CIBIL score higher than 700. Get tips to increase your credit score and increase your chances of getting a personal unsecured loan. A person can also apply for a business unsecured loan by providing documents like financial statements, UDHYAM certificate, GST return in addition to the KYC documents and credit score.

Mentioned below are the types of unsecured loans.

• Personal Loans

• Unsecured Business Loans

• Wedding Loan

• Vacation Loan

• Medical Loan

• Chartered Loan

• Doctor Loan

Also read: Types of Secured and Unsecured Loans

Difference Between a Secured Loan and an Unsecured Loan?

The key pointers of secured loans and unsecured loans are mentioned below in the table. When you are opting for a loan you must know the difference between a secured loan and an unsecured loan.

Unsecured vs Secured Loan

Unsecured Loan vs. Secured Loan: Understanding the Difference

Loans are a common way to access funds for various financial needs, and they can be broadly categorized into two main types: unsecured loans and secured loans. These two types of loans differ significantly in terms of risk, collateral, interest rates, and eligibility criteria. Let's explore the key differences between unsecured and secured loans:

1. Collateral Requirement:

• Unsecured Loan: An unsecured loan does not require collateral. Lenders extend credit based on the borrower's creditworthiness and ability to repay the loan. Examples of unsecured loans include instant personal loans, credit cards, and student loans.
• Secured Loan: A secured loan, on the other hand, requires collateral, which is an asset that the borrower pledges as security for the loan. Common examples of secured loans include mortgages and auto loans, where the house or the car serves as collateral.

2. Risk:

• Unsecured Loan: Unsecured loans are riskier for lenders because there is no collateral to recover in case of default. As a result, these loans typically have higher interest rates and stricter eligibility criteria.
• Secured Loan: Secured loans are less risky for lenders since they can seize the collateral if the borrower fails to repay. Consequently, secured loans often have lower interest rates and are more accessible to borrowers with lower credit scores.

3. Interest Rates:

• Unsecured Loan: Interest rates for unsecured loans tend to be higher, primarily because of the increased risk to the lender. These rates can vary based on the borrower's credit score and financial history.
• Secured Loan: Secured loans generally offer lower interest rates since the collateral provides security to the lender. The interest rate may still depend on the borrower's creditworthiness but is typically more favorable.

4. Eligibility Criteria:

• Unsecured Loan: To qualify for an unsecured loan, borrowers typically need a good credit score, stable income, and a strong credit history. Lenders evaluate these factors to determine the borrower's creditworthiness.
• Secured Loan: Secured loans are often more accessible to a wider range of borrowers, including those with less-than-perfect credit, because the collateral reduces the lender's risk.

5. Loan Amount:

• Unsecured Loan: Unsecured loans usually offer smaller loan amounts compared to secured loans. These are suitable for shorter-term, smaller financial needs.
• Secured Loan: Secured loans can provide larger loan amounts, making them suitable for significant expenses such as buying a house or a car.

6. Days of Disbursement:

• Secured Loan: Secured Loan usually takes more days for disbursal as compared to unsecured loans.
• Unsecured Loans: Unsecured loans get disbursed quickly and easily with less documentation.

7. Documentation:

• Secured Loans: These type of loans requires more documentation. A borrower must present the collateral documents and also complete the process of documentation.
• Unsecured Loans: These types of loans require less documentation. You just need to submit the KYC documents, employment proof, and income proof to get the documentation done for unsecured loans.

Which one is better Secured or Unsecured Loan?

Secured or unsecured loans both are good options to quench the financial thirst of a person. An unsecured loan is a riskier form of loan as compared to a secured loan. But another important factor is that an unsecured loan is offered with less documentation and provides quick disbursement. Therefore, the applicant should choose the best option among secured or unsecured loans.

Conclusion

The article above will guide you about secured and unsecured loans. It shall provide you brief of the pros and cons of unsecured and secured loans. Get instant approval of loans and pave the way to success with My Mudra. We are here to change the perception of people who are taking loans as a burden to making the loan a planned decision.

Also read: Are Personal Loans Secured or Unsecured?