There are a number of loans available in the market today. While their features and benefits may vary, loans can largely be categorized into secured loans and unsecured loans. What are the differences between secured loans and unsecured loans? Which one is more advantageous for you? Read on to more
Given below is a comparison of the two types of loans and how they impact your finances as a borrower.
| Feature | Secured Loan | Unsecured Loan |
|---|---|---|
| Collateral | Required | Not Required |
| Interest Rate | Lower comparatively | Higher comparatively |
| Tax benefits available | No tax benefits | Higher comparatively |
| Loan Amount | Higher comparatively | Lower comparatively |
| Repayment Term | Longer comparatively | Shorter comparatively |
Loans that are provided against collateral are known as secured loans. This means that as a borrower, you can avail of a loan only if you provide collateral to the lender which will be given back after the loan has been fully repaid. For example, if you avail of a home loan, the house in question will be in possession of the lender until the loan has been repaid. Other collateral such as stocks, bonds, fixed deposits can also be used as security.
Secured loans are common if the amount to be borrowed is large. The higher the loan amount availed, the higher is the risk for the lender, therefore providing collateral is a way to mitigate this risk. However, the borrower must be cautious and ensure that the loan is fully repaid. This is because, in the event of the borrower being unable to clear the loan, the lender can sell the collateral provided and raise funds to cover the loan.
Common examples of secured loans include home loans, auto loans, gold loans, etc.
As the name suggests, unsecured loans refer to credit that is provided without collateral. Borrowers will not have to provide any guarantee or security to avail these types of loans. Due to this, the risk for the lender is high therefore unsecured loans come with higher rates of interest as compared to secured loans.
The eligibility criteria in place are also quite strict and place emphasis on a high credit score and other factors that can determine the borrower’s repayment ability. While there is no loss of collateral if the borrower is unable to repay the loan, his/her credit score will get severely affected making it difficult for him/her to borrow again in the future. As the risk factor is high for lenders, the interest rate is higher and the loan amount that can be borrowed is also lower as compared to secured loans. However, the disbursal process might be slightly faster.
Examples of unsecured loans include credit cards, personal loans, student loans, etc.
The answer is simple. Choosing the right loan is entirely dependent on your requirement and financial situation.
Secured loans are generally easier to obtain as they are less risky for the lender and borrowers can avail of much higher amounts. Additionally, the rate of interest charged on secured loans is lower with longer repayment terms which means that the EMI will be affordable as compared to unsecured loans. Due to this, secured loan contracts are much more favorable for borrowers. However, if borrowers do not have collateral to provide and require a smaller amount, they can opt for unsecured loans. The rate of interest will be higher and the repayment term will be lower which results in a high EMI. This can be a burden on their finances. Choosing an unsecured loan provider whose terms and conditions meet your requirements is essential.
Availing of a loan is a matter of responsibility. Borrowers must avail of loans only if they are in the position to repay it over time.
It is important to choose loans that suit your requirement and not on the basis of popularity or other criteria. Additionally, ensure that you are able to repay the loan over time as not doing so can be detrimental to your credit score. While most loans are given only to those with high credit scores, lenders such as Money View offer personal loans to those with relatively low credit scores as well. Compare offers between different lenders and make a decision that fits your needs.
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