You are looking to raise money for which you search for lenders in the market who will give you the best interest rate. While doing so, you come across secured vs unsecured loans. Now, what do they mean and which one is better? Here are the pros and cons of both the types of loans which will help you make the right decision.
What is Secured Loan?
A secured loan is a type of account where the borrower pledges some asset like a car or property or any other personal asset as collateral for the loan. A personal asset is kept as collateral to keep to increase the creditworthiness. In case a person defaults to pay the loan, the lender has the right to take possession of the collateral as agreed. The most common examples of secured loans are car loan, gold loan and a mortgage loan.
In case a person’s personal asset is auctioned due to default in payment, still, the borrower may have to pay money to the lender because sometimes the market value of the asset is less than the loan taken. If this is the case, you will have to pay the rest of the amount to the lender.
What is Unsecured Loan?
An unsecured loan is a type of loan where you borrow money from a bank or another lender and agree to make regular payments without pledging your personal asset as collateral. In case a borrower defaults to pay the loan amount then the borrower cannot possess any of the personal assets of the borrower. This type of loan is purely sanctioned on credit eligibility of a borrower. Credit card, personal loan-travel loan, education loan are the best examples of unsecured loan.
Difference between secured and unsecured loans
|Details||Secured Loan||Unsecured Loan|
|Loan Amount||The higher loan amount can be availed in a secured loan||The lower loan amount can be availed in a secured loan|
|Collateral||Any personal asset is required for collateral||No personal asset is required for collateral|
|Tenure||The flexible tenor of up to 25 years||Tenure is for 12-60 months|
|Interest Rate||Interest rate is high which typically ranges between 18-36%||Interest rate is low which typically ranges between 5-35%|
|Documentation||● Proof of identity
● Proof of age
● Proof of income
● Proof of residence
● Original property documents of the property that is being pledged as collateral against the loan.
● Bank statements for the last 6 months.
|● Duly filled loan application form
● A couple of passport-size photographs of loan borrower
● Identity proof – passport, driving license, voters ID, PAN card (anyone proof)
● Proof of residence – utility bill, passport, etc.
● Salary slips for last 3 or last 6 months
|Disbursement Time||Might take up to 7-15 days||Will take up to 24-48 days|
|Example||Loan against property, Home Loan, Car loan||Personal Loan, unsecured business loans, credit card purchases|
Factors to decide which kind of loan should be taken
- Firstly, check which type of loan is providing you with a lower rate of interest. After that check, if you have any personal asset to pledge as collateral. Most importantly analyze your repayment capability. You are taking a loan for your personal needs or for business purpose.
Prefer secured loan when:-
- When you have calculated the EMI using EMI calculators and you know you can pay the loan amount on time
- If you can choose between a fixed and variable rate (Home Loan) and decide to pay nothing for the initial term of the loan.
- If you have more saving options and have greater financial flexibility
Prefer unsecured loan when:-
- If you don’t have any mortgage to pledge as collateral then you should go ahead with this
- If you need money immediately and don’t want to get into too much documentation process
- You need a really small amount of money which can be repaid in small tenor
Now you know merits and demerits of both secured as well as an unsecured loan. Next time whenever you opt for any kind of loan keep these factors in mind. For instance, if you need a larger amount of money and you can pay EMI on time without financial burden then secured a loan is a good option. Whereas, if you are in need of money immediately and the amount is not high then you should go for unsecured loans.