Secured Loans vs. Unsecured Loans: Difference, Benefits

09 DECEMBER, 2022

Planning to buy a home soon? Getting a loan for this is a beneficial option for many reasons. However, deciding whether to apply for a secured or unsecured loan can sometimes be challenging.

Many banks will extend secured or unsecured loans to you. You need to understand what these loans refer to, what they offer, how they work, and how you can benefit from them. This article provides a brief overview of secured and unsecured loans. It explains what they are, the difference between them, and the benefits of getting a loan. Given below are key aspects that will help you explore everything you need to know about secured and unsecured loans.

Secured vs Unsecured Loans- A Brief

A secured loan refers to a loan type which requires a borrower to pledge an asset as collateral to get the desired money. It means in exchange for your property or other valuables, the bank will give you money. When you fail to repay the loan, the bank sells your asset to recover the loan. You can offer a vehicle or house to get a secured loan. Also, many banks will give you a loan with land as collateral. A title deed for the land is needed when you want to use it as collateral.

On the other hand, an unsecured loan application doesn't involve pledging property to get the money. The bank won't ask for collateral to give you an unsecured loan. You need to meet the bank's eligibility criteria to be approved for an unsecured loan. The criteria to get unsecured loans include high credit scores and a minimum income.

Difference between Secured and Unsecured Loans

Interest Rate Differences

Opt for a secured loan to get a low-interest rate loan. Due to the risks involved, many banks charge higher interest rates for unsecured loans. The reason unsecured loans have higher rates of interest than secured loans is the unavailability of collateral.

Asset Risks between Secured vs Unsecured

When you have collateral to secure your loan, you get a loan with a lower interest rate than an unsecured loan. When you fail to repay your secured loan, your property is sold by the bank to regain the loan amount. Defaulting on a secured loan means banks can sell your assets to recover the loan.

In contrast, you don't risk assets when borrowing an unsecured loan. You get an unsecured loan collateral-free. You might have to meet strict loan eligibility criteria for your loan to get approved.

Amount Difference between Secured and Unsecured Loans

You can borrow a considerable amount by choosing a secured loan option. When you pledge your asset, you give the bank confidence that you'll repay the loan. Using your property as collateral is the best alternative for borrowing a high loan amount. For example, when you give your home as collateral, you get a loan based on the house's current value. That means you get a huge amount.

On the other hand, an unsecured loan amount is less than what you get offered in a secured loan. Also, you are expected to have a good credit history and a reliable income source to get approved for an unsecured loan.

Accessibility Difference Between Secured vs Unsecured Loan

You'll access a secured loan with more ease than an unsecured loan. Secured loans are less risky, which is why banks don't hesitate much before granting secure loans. On the other hand, you could face challenges in getting an unsecured loan due to risk considerations by your banks.

Loan Tenure Difference between Secured and Unsecured Loan

When you want a loan with repayment flexibility, borrow a secured loan. Such loans come with extended repayment, saving you from the repayment pressure. An unsecured loan is risky, and banks give out the loan for a short repayment period of up to 60 months.

Advantages of Secured Loans

Higher Borrowing Limit

You can enjoy a larger borrowing limit by choosing a secured loan scheme. Let's say you want to build or buy a home. In this case, you require a huge loan and a secured Home Loan will be suitable for you. Your purchased property acts as a collateral in a secured Home Loan. The loan limit will be up to 90% of your house market value.

Low Cost of Borrowing

Loans attract costs in terms of the payable interest, processing fee and other charges. You pay less interest on your borrowed money when you get a loan at low interest. Secured loans come with lower interest rates than unsecured ones since the risk of lending is minimal.

Repayment Flexibility

A longer tenure is available in a secured loan giving you the benefit of managing other expenses. Plus you’ll pay a small EMI for the borrowed amount as a longer tenure makes EMIs more affordable.

Advantages of Unsecured Loan

Quicker Loan Application Process

Applying for an unsecured loan isn't complex compared to a secure one. No property valuation is required when applying for an unsecured loan. This makes your loan application faster and less complex. When it comes to unsecured loans, banks don't ask for any asset to approve the loans, which can benefit many borrowers.