What you need to know about Secured and Unsecured Loans
Loans are an indispensable part of our lives at some point or the other. However, before taking a loan, it's important to be fully aware of the different types of loans, and their benefits or caveats.
When it comes to loans, there are two main types – Secured and Unsecured. You must be aware of the differences between the two types of loans so that you can avoid getting into an undesirable situation later on.
The key difference between a secured and unsecured loan is that you have to provide some type of collateral for the former. This one difference has a significant impact later on, as it affects your interest rate, borrowing limit and repayment terms, among other things.
Keeping that in mind, let's delve deeper into the two types of loans, beginning with secured loans.
What is a Secured Loan?
A secured loan requires the borrower to pledge an asset of roughly equal value as the loan amount, such as land, property, vehicle, and jewellery. This is known as collateral.
As a result of the collateral, the lender is at minimum risk since he can simply seize the asset in case of non-payment of the loan by the borrower.
Also, secured loans are usually more difficult to qualify for than unsecured loans, and feature high borrowing limits, and allow for long tenures of repayment.
Why you should consider a secured loan:
They are low-interest loans.
The borrowing limit is high
They allow for a long repayment period.
Why you shouldn't consider a secured loan
Despite the above-mentioned advantages such as lower interest rates and longer repayment tenure, should you still be unable to pay back your loan on time, the lender will seize or sell your collateral.
Your credit score will be affected negatively too, in case of non-repayment.
What are typical examples of secured loans?
Home Loans: This is one of the most popular types of loans from banks. In this case, the new home for which you are taking the loan is the collateral.
Gold Loan: Those in dire need of money can pledge their gold as collateral to obtain a bank loan that is around 75 percent of the gold's value.
Car Loan: After a home loan is paid off, the next step for many people on their way up in life is a car loan. The car is the collateral in this case.
Loan Against Property: When you mortgage your residential or commercial property as collateral, you're eligible for a secured loan at a considerably low-interest rate.
What is an Unsecured Loan?
Unsecured loans, as we mentioned earlier, are not backed up by any sort of collateral such as property, jewellery, etc. As a result of being loans with collateral not involved, it is the lender who bears the highest risk in the case of unsecured loans. Due to this, unsecured loans usually have significantly high-interest rates, much more so than secured loans.
Also, as a result, unsecured loans are for much smaller amounts than secured loans.
Why you should consider an unsecured loan
If you can make your loan repayments on time, you'll improve your credit score.
There are usually not too many terms and conditions in unsecured loans, and whatever criteria have been set are relatively simple.
In the event that you're unable to pay back your loan, there are no assets pledged to the lender which they can seize
Unlike secured loans such as home loans or car loans, for example, you have greater freedom to use an unsecured loan for any purpose that you see fit.
Why you shouldn't consider an unsecured loan
Interest rates on unsecured loans are very high
Repayment schedules are very short, and coupled with the high-interest rates, can be difficult to keep up with
In case you fail to make timely repayments on a loan, your credit score is at risk of taking a beating.
What are popular examples of unsecured loans?
Credit Cards: This is one of the oldest forms of unsecured loans, where you're billed once a month, and interest is charged on any outstanding balance.
Personal Line of Credit: While similar to credit cards, a line of credit loan usually comes with a far lower interest rate. Also, they come up with an approved credit limit that can be used any way you like.
Personal Loans: These are loans for personal use and can be used in a variety of ways, such as medical, phone bills, travel, studies, and based on your credit history, and the loan amount can range from a few thousand rupees up to a few lakhs.
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