What’s The Difference Between Secured And Unsecured Loan?

 All types of loans are secured or unsecured. In both cases, the borrower is required to borrow money from the lender, pay interest on the borrowed amount, and repay the loan in monthly installments over a predetermined period. However, there are some key distinctions between unsecured and secured loans, such as the degree of risk associated with them, the amount of debt that can be borrowed, and the interest rate that can be charged.

What Is A Secured Loan?

Secured loans are a type of borrowing that require the use of a valuable asset or property as collateral to secure the loan. These assets may include a home, but may also include other assets such as a vehicle or jewelry. 

In the event of a loan default, lenders have the legal right to take possession of the asset or property offered as collateral to recoup the loan amount. Secured loans offer a reduced risk to the lender, and are typically offered at lower interest rates. Nevertheless, lenders will assess your credit and financial history to determine whether to offer you a loan.

Also Read: Why Unsecured Business Loans Have Become Popular In India?

What Is An Unsecured Loan?

Unsecured loans are a simpler form of borrowing than secured loans, as they do not necessitate the provision of collateral. The loan amount is determined by the credit and financial standing of the borrower, rather than the value of the asset. 

As unsecured loans present a greater risk to lenders, they are subject to higher interest rates. Having a good credit score indicates the borrower's ability to make repayments on time, which can result in better loan approval and lower interest rates.

What Is The Borrowing Limit For Secured Loan Vs Unsecured Loan?

There is a borrowing limit for both secured and unsecured loans. However, this varies for both types of loans. Not just that, the borrowing limit for both these loans will also differ for various lenders. This means that lenders only have your prior credit history as a guarantee that you will pay back the loan. 

Furthermore, there is no collateral such as property or other assets that could be held against you in the event that you cease to pay back the loan and default. This makes unsecured lending a higher risk for lenders and, consequently, you may not be able to access as much money as with a secured loan. 

On the other hand, secured loans are considered to be less risky for lenders, as they offer an asset as collateral in the event of a borrower's non-repayment. This means that borrowers can typically borrow larger sums over a longer period of time, potentially at a lower interest rate. It is important to note, however, that if the loan is repaid over a longer period, it will have an impact on the overall interest rate.

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What’s The Repayment Period For Secured And Unsecured Loans?

Both unsecured and secured loans are usually paid back over a set period of time. Unsecured loans usually have a fixed interest rate, so you'd usually have to pay the same amount every month. Secured loans, on the other hand, have a variable interest rate, so your payments could go up or down depending on the interest rate. 

They also usually have longer repayment periods. If you can't pay back the loan, your house and other stuff won't be in danger since it wasn't used as collateral for the loan, but your credit score could take a hit and you could end up in court. Secured loans are more risky because you might lose the asset you're borrowing against if you can't keep up with payments.

What Purposes Are Secured And Unsecured Loans Used For?

Loan providers typically do not inquire as to the purpose of the loan, however, this information may be requested as part of the loan application. Unsecured personal loans are often used to finance costly purchases, such as a vehicle or home appliance. These types of personal loans can come in handy for things like special occasions, a holiday trip, or even a wedding.

Similarly, unsecured loans may be used to finance home improvements, although a secured loan may be more suitable as it typically allows for a larger loan amount to be borrowed. Secured loans are often used for the purpose of consolidating existing debts in order to streamline the repayment schedule.

Also Read: What Is NPA And Its Impact On Indian Economy?

Secured And Unsecured Loan: Which One Is Better?

It is ultimately up to the individual to decide whether to apply for an unsecured or secured loan. To make an informed decision, it is important to consider factors such as the amount of the loan, the repayment period, the financial situation, and the credit score. 

Additionally, it is recommended to compare the terms of both unsecured and secured loans to determine which deals are suitable for you, taking into account the total cost of the loan rather than the interest rate alone. It is recommended to prepare the information prior to applying for a loan and to check the credit score beforehand, as this will help to improve the credit score if necessary.

Summing Up

Now you're probably wondering which loan is better. Well, the truth is, there's no one-size-fits-all answer. It all depends on what you need and what you can handle as a borrower.