What is Secured Loan and Unsecured Loan?
Basically, loans are divided into two categories, secured loan and unsecured loan. Loans which are to be issued with a collateral security or asset are known as secured loans. When no property or asset is provided for availing loan amount, it is known as unsecured loan.
While applying for loan, we consider two aspects: How much will be issued as loan and what is to be submitted? Well, you need to give something in order to gain something, even for acquiring loan. Secured loans serve this purpose. Some banks or institutions do not consider your property or asset as the basis for availing loan. Thus, unsecured loans are issued for this purpose.
Difference with respect to collateral security
The basic difference lies in their names. In secured loans, you need to submit to the bank a collateral security. This security can be your property or your car. You may even submit your shares, bonds, or gold for availing loan. The bank or the institution will take the possession and the deed till the loan amount is repaid completely, along with interest and related charges.
Unsecured loans do not require submission of any collateral security. Examples of unsecured loans are credit cards, education loans and home renovation loans.
Difference with respect to interest rates charged
This is another point of difference which you need to consider before applying for loan. For secured loans, you are submitting collateral. Hence, the interest rates charged will be less as compared to that of unsecured loans.
In unsecured loans, the lender is actually taking a risk of issuing you loan amount without asking for any security. Hence, banks charge higher rates of interest.
Difference with respect to application process
Secured loans are issued on the basis of your collateral security. For example, the purity of gold is checked. The property and its legal title are verified.
Unsecured loans are issued on the basis of your repayment capacity. If your credit score is bad, but have security, then you may opt for secured loan instead.
Difference with respect to convenience
If you need a large amount of money, then secured loans are the best. When your property or home is with the bank, you will pressurize yourself to do your best in the loan repayment. Lenders generally issue large sums of money if you are providing good collateral such as property, flat or your car.
If you need money for a short-term requirement and you do not wish to give away your property for that purpose, then you can surely go for unsecured loans.
Difference with respect to repayment
You must note that you are required to repay the loan in fixed installments. Till the last date of repayment, your property or car belongs to the bank. You may feel emotionally charged due to this.
In unsecured loans, the repayment terms are difficult as the interest rates will be higher. If you do not repay within the timelines, you will be charged with more interest but you will not lose your property or any other asset.
Thus, you can choose between secured and unsecured loans as per your requirements.
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Secured loans are best for a long-term basis and unsecured loans are best for short period. Secured loans are easier to get as you mortgage some of your assets with the bank and the bank is comfortable to give large amount of money as a loan. The bank can claim your assets, if you fail to repay the loan. Unsecured loans are good for the borrower but are very risky for the lender. Such loans are usually difficult to get because the borrower needs to have a strong credibility. The lender may not be comfortable to lend money as there is no security.
With unsecured loans, you can kiss goodbye the opportunity of lending a very large amount of money. If you have no other option, start out with a small unsecured loan and make your investments in assets work… then later down the track you can use those assets to get a secured loan for the amount you require. If you read more about financial planning (it’s not just budgeting), then you can really make the difference between these two loans work for you.
A very well written article. It sheds light on all the issues with differences being properly marked. The only question that arises is if the amount is large or the collateral to kept as security is not sufficient, so in that case do we get a mixed of both type without any extra charge? What will be the preference?