You may have been contacted by a lender offering an instant loan, promoting attractive rates of interest, or requesting a secured loan. Only a handful of people understand the differences in these types of loans. Knowing the differences between secured and unsecured loans is an essential step in becoming financially literate. It can also help when you need to borrow money and are facing a tight budget.
Unsecured Vs Secured Loan
As a form of security, secured loans require collateral. Collateral can include assets owned by the borrower, or in certain cases fixed deposits or provident fund. The lender keeps the collateral throughout the repayment period. If the borrower does not repay the loan within a certain period, then the lender will take ownership of the collateral to recover the amount. Mortgage loans, loans for home or gold loans are some examples of secured loans.
Secured loans require collateral and security, whereas Unsecured Loans do not. The borrower’s debt-to-income ratio and repayment ability are used to approve and disburse these loans. The creditworthiness is determined by the current income of the borrower. Online personal loans, Instant Loans and Same Day loans are the best examples of unsecured loans.
| Secured Loans | Unsecured loans |
| This loan requires collateral. | There is no collateral required. |
| It can be a long process. | Instant loans are available. |
| Low interest rates on secured loans | Unsecured loans have a higher interest rate. |
| The borrowing limit for secured loans is higher. | The borrowing limit for unsecured loans is lower |
| Ownership of collateralized assets is put at risk. | There is no risk involved. |
| The approval of the loan is usually 70% of what is secured as an asset. | Your repayment ability (income) will determine the loan amount. |
Which is the best loan for you?
You should be aware that there are both secured and unsecured loans if you’re in need of cash. Make the best choice based on your needs, requirements and affordability. Here are some tips to choose the right loan.
- Your ability to provide collateral/guarantee: If you are looking for a bigger loan amount and you have assets say, land or any property which you can give as collateral then you can go with a secured loan as you will you able to get the desired amount that too at a lower interest rate. If you do not have collateral, or any other security to offer as security for the loan you may be able to get an unsecured Personal Loan.
- You can get a small amount of money from online lenders. They can offer you an instant loan, a same-day loan, or an online personal loan. It is the most convenient option because there are no limitations on how the money can be used. You can also apply online and from your own home. If you want a larger loan and aren’t eligible for an instant personal loan, you can go with a secured loan.
- When you will need the money: Unsecured personal loans do not require collateral and can be approved within hours. Unsecured personal loans are the most suitable option for people who need emergency or quick funding. If you are looking for funds to cover a planned expenditure and you have a short-term requirement of less than 7-10 days, you should consider secured loans.
It is crucial to select a loan that will meet your needs and fulfill them, whether you choose a secured or unsecured loan such as a personal one. Secured and unsecured loan features and offerings are different. It is important to understand the differences between secured and unsecured loans, as this will help you choose which loan best suits you. Don’t forget, however, to consider your ability to repay and affordability prior applying for either of the two loans.
