What is the Difference Between Secured and Unsecured Loans?
The two most popular types of loans are secured and unsecured loans. The loans secured against an asset are called secured loans. The lender keeps the ownership deed of the asset until you pay back the entire loan amount. On the other hand, loans offered without pledging any collateral are termed unsecured. The lender offers credit on your repaying capability. Depending on each type of loan, the interest rate, tenure, disbursal time, etc. are different. This article discusses the difference between secured and unsecured loans in detail. Read on!
What is a Secured Loan?
Secured loan refers to loans backed by some asset. In this loan, the lender or institution gives a condition to the borrower in which he/she has to keep an asset or security as a mortgage. If the person borrowing the money fails to repay the same, then the institution can recover it by selling the pledged asset.
What is an Unsecured Loan?
Unsecured loans are collateral-free (you do not need to transfer a valuable asset to the lender to get a loan). These are offered to borrowers based on their repaying capabilities or credit scores. This loan is also known as a good faith loan. Before lending you the credit, lenders will verify your income, repayment history, income tax returns, etc. The interest rate is much higher in an unsecured or signature loan because of the risk factor involved. This means there is much scope for the borrower to default or, in the worst-case scenario, not repay the debt.
What are the Differences between Secured and Unsecured Loans?
The main differences between a secured or collateral loans and unsecured or signature loans are:
| Aspects | Secured or Collateral Loan | Unsecured or Signature Loan |
| Amount of loan | High | Low |
| Interest rates | Lower than Unsecured | Higher than secured |
| Tenancy | Around 15-30 years | Maximum 5 years |
| Dismemberment speed | Time taking | Very quick |
| Requirement for security | Compulsory | Not compulsory |
| Credit score | It can be offered if your credit score is low | It can be offered only if your credit score is good |
Points to Consider While Opting for a Loan
There is no telling when an individual will need funds. It can be for purchasing a home or a car, funding weddings, medical expenses, etc. All you need is to thoroughly research the financial institutions offering loans. Remember that every bank has different policies and guidelines. Consider them before making your decision. However, there are some vital points that you should follow while opting for a loan:
- Select the Type of Loan
There always exists a reason whenever you need a loan. There are many types of loans available under secured and unsecured loans. They are personal loans, student loans, business loans, equity loans, etc. You have to figure out the type of loan you want that meets your need. If required, you can consult a loan agent too. After deciding, acknowledge every aspect of the following loan, including its features and benefits, before taking any action.
- Rate of Interest
After you decide to borrow a loan, visit multiple financial institutions or loan agents to get a better idea. Your loan appeal will get approved if you are trustworthy in paying dues. At the lending time, the bank will charge an extra amount to the original amount, called an interest rate. This added amount, along with the base amount, must be paid at the time of repayment.
- Hold a Proper Credit Score
Keep in mind that your credit or CIBIL score will indicate your reliability for lending the credit. The lowest CIBIL score is 300, whereas the highest is 900. A person with a CIBIL score above 700 is ideal for taking a loan. Maintaining a proper credit score is not that hectic. All you need to do is pay your dues within the mentioned time. As you fail to make the payments on time, your CIBIL score will drop rapidly.
- Consider Your Financial Status
Always remember to check your financial situation while taking a loan. Verify properly whether the loan you are taking fulfils your need or not. If you blindly decide, you may bring a financial burden upon yourself instead of finding any solution. So consider your financial status and make a proper plan for taking the loan.
- Avoid Fraudulent Offers
Sometimes, you will come across some lenders who offer fake loan schemes or lower-interest rates. But after taking the loan, you will figure out that its price is much higher than the amount estimated. Usually, it has a floating interest rate that makes the interest rate look lower, but it increases as time passes.
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Secured Loan vs Unsecured Loan: Which is Better?
A secured loan has collateral attached to it. The individual borrowing credit has to pledge his/her asset to the lender. Thus, if that individual fails to repay the loan amount, the lender will sell that property to recover the loan amount. Selecting a secured loan is perfect for people with a lower credit score.
Whereas in unsecured loans, one need not pledge any asset as collateral. There is no need to keep any property as a mortgage. The loan amount is credited to the borrower based on his/her credit score. Having an ideal credit score will assure your loan’s approval quite easily. But the rate of interest in unsecured loans is comparatively higher.
Which Type of Loan Should You Pay Off First?
If the question is regarding paying a debt, then it must be given the top-most priority. The payment must be made within the specified time along with the interest rate. In the case of unsecured loans, extra attention is given to credit scores.
If you want this loan but lack a high credit score, you can take advantage of the avalanche method. In this method, your credit score will improve within a very short time. This will help you to pay off your debts without any hassle.
If you suddenly become bankrupt, it will act as a solution for paying off your dues. But it will severely affect your credit score and lessen your chance of getting further loans in the future.
Final Word
Although loans may appear as a good solution to improve your living or reduce the burden of financial instability, remember to take loans only in case of any emergency. From the above content, it is quite clear about the difference between secured and unsecured loans. Both of them have some advantages and disadvantages. Hence you need to consider every crucial point before borrowing any type of loan.
FAQs on the Difference Between Secured Loan and Unsecured Loan
Ans: Yes. An unsecured or signature Loan doesn’t require any asset to be kept as collateral. Hence, the interest rate is much higher than a secured or collateral loan.
Ans: If you study both the loans thoroughly, you will find that the repayment period for a secured loan is much longer, with a more borrowing limit alongside a low-interest rate. These factors make secured or collateral loans easy to afford.
Ans: The full form of CIBIL is Credit Information Bureau (India) Limited. It is the most dominating out of all the credit information agencies. The CIBIL got its certification from the Reserve Bank of India.
Ans: Maybe. Since CIBIL score ranges between 300-900, 600 is considered low when assessing one’s creditworthiness. Hence, the approval of a cash loan for such applicants depends completely on the financial institution’s discretion. But a CIBIL score above 750 is treated as perfect, and that individual can take a loan at any time.
Ans: Examples of secured or collateral loans are home loans, car loans, loans against property (LAP), etc. On the other hand, examples of unsecured or signature loans are student loans, wedding loans, loans for house renovations, etc.
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