Difference between secured and unsecured loans

Difference between secured and unsecured loans

There are two categories under which all loans are classified. They are the secured loans and unsecured loans. While the secured loans ask for collateral, the unsecured loans do not ask the borrower to pledge any collateral. There are certain other key differences between the secured and the unsecured loans. Click here to know more about them.

Key differences between secured and unsecured loans

  • Collateral – As stated, collateral plays an important role in any loan. Collateral is an asset that you mortgage when you take a loan. The lender uses the collateral as a risk-proof assurance. If you do not repay the loan, the collateral is seized by the lender and used to cover the costs of the loan. All secured loans such as home loans, loans against property, car loans, etc have collaterals attached to them. The unsecured loans, on the other hand, are given without collateral. To get a personal loan or any other unsecured loan, you do not need to have any kind of collateral.
  • Interest rate – Since collateral is used in a secured loan, the risk associated with it is lesser. For this reason, the interest rate of a secured loan is lower as compared to the interest rate of an unsecured loan. When the lender offers the unsecured loan without collateral, a major risk is undertaken. To cover this risk, the interest rates are hiked.
  • Loan tenure – When you take a home loan, you can repay it over a period of 20 or 25 years. This is the case with many types of secured loans. The repayment scheme is more relaxed and the borrower can repay the amount over many years. The case is not quite the same with the unsecured loans as the tenure here is shorter. Most lenders in India offer personal loans and other unsecured loans for a maximum tenure of 5 years.
  • Loan value – The value of the loan, or the loan principal, in other words, is also different in a secured loan as compared to an unsecured loan. You can get a secured loan such as a home loan for very large amounts that can even go up in crores. However, for an unsecured loan, the principal is never that high. For example, if you are opting for a personal loan, you can get a maximum amount of about INR 5 lakhs from a majority of the lenders in India.
  • Role of credit score – And finally, the role of the credit score also differs between the two types of loans. The credit score is an important factor that is considered when giving any loan, but it is the most crucial factor in unsecured loans. You can get the unsecured loan easily with a good credit score and vice-versa. In secured loans to the credit score is evaluated, but not as strictly as it is done in an unsecured loan.

These are some of the most important differences between the secured and the unsecured loans that you need to remember before you apply for a loan of your choice.

The final word

The process of getting a loan has become a lot simpler these days. All you have to do is go online, download the app of a digital loan provider and make a quick and instant application. If you meet the eligibility criteria, your loan is approved within minutes and you receive the loan amount the very next day. These facilities are available for secured loans such as home loans as well as for unsecured loans such as personal loans. Make use of this benefit and get a good loan at a good rate without any further delay.

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