Secured vs. Unsecured loans – Laying the confusion to rest

what's the difference between secured loan and unsecured loan

Introduction

A common question that is asked by a number of our ardent blog followers is the difference between a secured and an unsecured loan. Now both are forms of credit that we avail of when in need. But they both differ in application process and terms of agreement. Through this post we will look at both secured and unsecured loans separately and leave it up to you to decide which the best solution that suits your circumstance is.

 

Loan

A loan in simple terms is an arrangement between lenders (someone who lends money) such as a bank or digital lending platform and a borrower (a salaried professional in need of money) like you and me. You as a borrower agree to repay the money along with interest to the lender based on a determined time period or tenure. The lender can ask for collateral to be included to bear the risk in case you default in repaying the loan. If no collateral, then the lender would look at your credit history information to estimate whether you are capable of fulfilling your loan EMI payments responsibly. Loans offer a way for banks to grow their overall revenue with the help of fees and interests they charge.

The terms of a loan are agreed by both the lender and the borrower before any money exchanges hands. The terms of loan need to specify the tenure, loan amount, the interest that the lender will levy, the monthly EMI repayment amount and any collateral if required by the lender. Loans are taken for number of purposes such as buying a vehicle, home, to start a business or cover personal expenses towards medical expenses, home improvement, travel holiday and wedding. The interest rates charged for availing a loan can either be fixed (remains constant for the tenure) or variable (change over time). If you cannot avail the loan due to low income, then a co-applicant can furnish his/her income information to get the loan. In case the primary borrower doesn’t pay the loan back, the co-applicant is liable to pay the loan back to the lender.

A loan comes with a repayment schedule which tells you when and how much you need to till the loan is cleared. Monthly payments are called EMI which is decided between you and the lender. You can choose from a number of repayment options depending upon your circumstance. You could do an accelerated repayment, step up or step down repayment or balloon repayment. Digital lending platforms allow you to clear off the penalty ahead of the tenure completion. Banks however charge a prepayment penalty to do the same. Tracking the loan EMI payments is important to know how much you have already paid and how much is still pending.

Loans typically are of two types – Secured and Unsecured loans. Let’s take a closer look at the two.

 

Secured Loan

These are loans that are protected by an asset or collateral. The purpose for the loan can itself be used as collateral. For e.g. house for a home loan or vehicle etc. The bank will hold the title or deed for the collateral until the loan is paid in full including interest. A large amount of money can be availed using a secured loan because the lender feels safe to approve the loan with the collateral in hand. You as a borrower will try to clear off the loan as quickly as possible to get the complete ownership of the asset or collateral. Secured loans are generally offered with low interest rates due to decreased risk involved and higher borrowing limits with longer repayment terms. Vehicle or home loans make use of the new vehicle or new property as collateral. Some more examples of secured loans are Gold loan, loan against insurance policies, loan against bank FDs, loans against PPF and EPF, loans against shares etc.

 

Advantages of Secured loans

  • Larger amounts – The loan amount which can be availed is usually larger because of the presence of collateral.
  • Interest rates – The interest rates for a secured loan is less.
  • Tenure – The tenure is medium to long term.
  • EMIs – The monthly installment amount is less due to the tenure being longer.

 

Unsecured loans

For unsecured loans, bank or lenders do not ask for collateral. An example of unsecured loan is personal loan. As there is no collateral, banks or digital lending platforms look at the borrower’s credit worthiness by evaluating their credit bureau report. Personal loan can be availed for personal expenses like medical, travel, home improvement, wedding etc. The borrower has to be a salaried professional. Banks do not approve a personal loan if the borrower has never availed of a loan before (no credit history). Digital lending platforms will still provide a loan for a borrower with no credit history but the borrower has to be working for at least the last 3 months. The loan application process for a personal loan is fastest for digital lending platforms. With loan application, document upload and disbursement happening online, it is the best option for a personal loan. Personal loans are short term loans. Some more types of unsecured loans are credit cards, student loans and P2P loans.

 

Advantages of Unsecured loan

  • No collateral – Loans approved by evaluating borrower’s credit worthiness
  • No stress – With no collateral involved, there is no fear of losing your assets.
  • Simpler process – Time and paperwork towards collateral verification is removed. Credit worthiness is evaluated and loan processed.
  • Easily availed for multiple purposes – You can get a personal loan for a number of reasons such as relocation, medical expenses, home improvement etc.

 

Loan Singh is a digital lending platform that prides in providing unsecured personal loans online to salaried individuals. You can apply for quick funds as an easy emergency loan which is not a bank loan, but unlike banks are provide with best personal loan interest rates. The instant funds or instant loans are small loans or cheap loans taken for purposes such as home improvement loan, house repair loan, marriage loan, medical loan, second hand car loan, second hand bike loan, vacation loan, travel loan. You can calculate your easy EMIs using our personal loan emi calculator. We accept bank statement, PAN and Aadhaar for quick loan approval. Bad credit score or credit report errors can lead to personal loan rejection. The ‘Loan Singh Blog’ is one of the best finance blogs in India.

13 thoughts on “Secured vs. Unsecured loans – Laying the confusion to rest

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