What is the Difference Between Secured Loan and Unsecured Loan

Today, customers have various options to fund their personal or business needs with the help of loans. But before one can reap the rewards of the same, it is crucial to choose the right loan product. Fortunately, there are two kinds of loans available in the market – secured and unsecured loans. Let’s take a closer look at the two and their key differences.

Let us understand them briefly.

What is a secured loan?

A secured loan has an asset backing it. Collateral is provided in the case of a secured loan. The asset provided as collateral has monetary value and thus the lender provides you with the required funds. In exchange, the lender holds a right on the said asset. In the event of default, the lender has the right to repossess and sell or auction the asset and compensate for its loss. The indisputable fact in the case of secured loans is that the interest rate applied and the processing fee charged is minimal. In case of mortgage loans wherein fixed assets such as a residential or commercial property is pledged as collateral, the tenure is much longer, thereby allowing the borrower to repay the loan through affordable EMIs.

What is an unsecured loan?

On the other hand, an unsecured loan does not have any assets backing it. In this case, no collateral is involved. As a result, the risk of an unsecured loan is significantly higher than that of a secured loan. The lender usually provides the borrower with an unsecured loan based on their credit score, repayment capacity, employment stability, income and other factors. The guarantee of receiving the money lent here is lower as the risk of default is high. Unsecured loans tend to have a higher interest rate.

As we have understood what secured and unsecured loans are, let us understand the difference between them.

Secured Loan vs Unsecured Loan:

Collateral-

In the case of secured loans, collateral is required. It means that an asset that has monetary value needs to be provided as security in exchange for borrowing funds. The lender then holds the deeds of the said asset. On the other hand, in the case of an unsecured loan, collateral is not required.

Loan amount-

The loan amount offered in secured loans is dependent on the collateral offered. In most cases, secured loans offer a high amount of loans when compared to unsecured loans. It is because, in an unsecured loan, the borrower offers no collateral.

Risk -

The risk factor in secured loans is much lower when compared to unsecured loans. In the event of default or non-payment, the lender can cover its losses by taking over the collateral offered. In unsecured loans, there is no collateral, thus there may be a huge loss for the lender.

Must Read: What is Collateral Loan

Interest-

As secured loans are more substantial and have collateral, the risk is minimized. Thus, the interest rate charged is low. On the other hand, in unsecured loans, the risk factor is high, and thus higher interest rates are levied on the borrower.

Term-

Secured loans offer more flexibility to the borrower, thereby allowing them to take up a loan for a longer term. Unsecured loans are taken up for the short term because the interest charged is high and the risk is also higher.

Terms and access-

Getting a secured loan has a lengthy process. The collateral is evaluated, the borrower is checked, and documentation is done, which ultimately slows down the entire process. The terms are complicated in the case of secured loans. On the other hand, as unsecured loans do not consist of collateral, the terms are easy and thus accessible. The process of getting an unsecured loan is shorter than getting a secured loan.

Credit score-

A credit score plays a significant role in getting a loan sanctioned. The borrower needs to have a clean credit history, and based on that, the loan application may be accepted. In the case of a secured loan, you can get a hefty loan along with collateral. An unsecured loan can also be taken up based on a high credit score (750 and above).

Must Read: Tips to improve your credit score

Conclusion:

A secured and unsecured loan provides the same benefit of having financial support. Depending on your requirement it is important to make a well-informed decision that works in your best interest. It is important to take up a loan that you can repay and are comfortable with. Thus, it is advised to take your time and research, only after the same is done, sign up an agreement.