Secured versus Unsecured Personal Loan

Posted by Tushar on April 28th, 2021

Personal loans are all the rage this decade. People are using loans to achieve their personal goals and acquiring their dreams. However, it is easy to get confused between all the different types of loans available and what to choose from; hence it is essential to understand the difference between secured personal loans and unsecured personal loans and understand and make the correct decision circumstances one faces. Apply an instant personal loan online today.

What are secured and unsecured loans?

The requirement for collateral is what divides loans into these two categories:

Secured loan

The notable fact about secured loans is that they get guarded against insurance or security. These loans get backed up by collateral; this means that in circumstances of the loan bearer failing to repay the loan amount, the financial institution has the authority to possess the collateral. Secured loans decrease the uncertainty for the financial institution. Such loans do not require credit which means individuals with zero or low credit may also acquire this loan. In such cases, the interest rate is also moderate, and one may attain a loan amount higher than one could without collateral.

There are several types of secured l loans, including:

• Home loan: Financial institutions avail of home loans where the house acts as collateral, and they may seize the property if the loan bearer fails to repay the loan amount. A home loan can get availed for extension and improvement as well. Home loans may have repayment security of up to 30 years, and institutions generally offer up to 75 to 90% of the property value.

• Auto loan: Financial institutions avail auto loans to the bearer who wishes to purchase a new or pre-owned vehicle. The majority of the financial institutions offer up to 90% of the cost of the chosen transport as a loan. Or 85% in the case of pre-owned vehicles. In this case, the transportation itself acts as collateral.

Unsecured loans

Unsecured loans do not involve collateral which means a higher risk for the financial institution. In the case of secured loans, the collateral covers the value of the loan given. But as unsecured loans do not have any such backups, they involve higher risk. While secured loans are easy to avail of even with zero or poor credit, unsecured loans require a good credit history.

Secured loans have low-interest rates with a long tenure of repayment, but unsecured loans have high interest rates that need to get paid in a shorter amount of time. These are some typical types of unsecured loans:

Personal loan

An unsecured personal loan is a zero security requirement loan, has flexible usage, and requires minimal paperwork. The loan amount for an unsecured personal loan can range up to 50 lakhs and needs repayment in a span of 12 to 60 months. However, unsecured personal loans come at higher risk, which means the interest rates are also high for unsecured personal loans.

Credit cards

Credit cards are popular as they are the quickest way to access funds in the form of credit. The usability limit gets determined based on the credit card owner's financial stability and income. The interest rates on credit cards usually start with double digits but prove worthwhile as credit card owners have access to additional benefits and bonuses. The process for applying for credit cards is easy and accessible to the general population. The interest rates of credit cards only apply to the amount spent by the owner, and the rewards are worth reaping.

Pre-approved loans

Specific bank customers have the eligibility for pre-approved loans. These are quite different from personal loans as they do not need additional paperwork as they are pre-approved and offered by the bank. Pre-approved loans allow loan bearers to have a personalized interest rate plan that is convenient for them.

The significant difference between the secured and unsecured loans is that of the requirement of collateral. A secured loan is beneficial for both the participating parties. That is, the loan bearer and the financial institution as the bearer doesn't have to repay with an extensive interest rate, and the financial institution has a guarantee regardless of whether the bearer manages to repay or not. While on the other hand, an unsecured loan leads to higher repayment than the loaned amount and involves a higher risk for the financial institution. 

However, different circumstances call for the need for different types of loans. There is no one size fits all approach for loans as people have varying requirements, incomes, expectations. And they hence may discuss their circumstances with a financial institution and reach the best decision for them.