Difference between a Secured and Unsecured Loan
“Do not save what is left after spending….but spend what is left after saving.”
What is a Secured Loan?
A secured loan is a loan given by the financial institutions where assets are collateral for security for the loan. One can use the house, gold, machine, etc. to avail a loan amount, which is equivalent to the asset value. In the case of a secured loan, the financial institution or bank will hold the ownership until the loan is paid off.
Examples of secured loans:
- Car loan
- Loan against property
- Home equity line of credit
What is an Unsecured Loan?
Unsecured loans, like the name suggests, is a loan that is not secured by collateral such as gold, land, machinery, etc. These loans are comparatively risky and the interest of these loans is also high. One should be very careful while applying for an unsecured loan because the risk of not paying the amount could be the worst nightmare. So one should evaluate their financial status before applying for an unsecured loan.
Examples of unsecured loans:
- Credit card
- Personal loan
- Student loan
Which one to choose, secured or unsecured loan?
Unsecured loans are easy to obtain, but the contract on a secured loan is usually more favorable for a borrower than an unsecured loan because often the repayment period is longer, the interest rates are less, borrowing limits are high. All these factors are beneficial from the viewpoint of an investor so opting for a secured loan is quite more favorable for a borrower.
One should opt for a secured loan as it is less risky. The borrower has to provide collateral to obtain a secured loan, there is a degree of confidence in the minds of the lender. The lender is assured to get back the money handed out, and if he is not able to pay back his loan the asset can be used to recover the loss of payment.
Difference between a secured loan and unsecured loan:
|Particulars||Secured Loan||Unsecured Loan|
|Collateral||In a secured loan the person needs a collateral if he is applying for a loan.||Unsecured loan there no terminology such as collateral.|
|Rate of Interest||Secured loans usually has a lower rate of interest as compared to unsecured loans.||Unsecured loans are risky by nature so the rate of interest is also high.|
|Easy to get||Secured loans are easy to get because the person needs to use collateral for the loan.||While an unsecured loan is hard to get because banks do check the creditworthiness of the person. And if the CIBIL score is less than 750 one cannot opt for an unsecured loan.|
|Payback Period||Secured loans have a longer payback period (5-10 years)||Unsecured is considered for short term.|
|Risk||Less Risky||More Risky|
#Think before you borrow
Secured and unsecured loan both types have strengths and weaknesses, which can vary according to the borrower and lender. If you plan to apply for a loan try to have a clear understanding of which option works best for your financial situation. Before you borrow to make sure you can afford to pay back your loan in a timely manner without crunching on your budget.