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Secured vs Unsecured Loans

A loan can be a big financial commitment. By taking one out, you will be required to give up a portion of your salary every month until the loan is paid off, and failing to do so could result in serious consequences.

There are two main types of loan: secured and unsecured. Each has their advantages and disadvantages, depending on a) your financial health and b) how much you want to borrow.

Secured loan

If a loan is ‘secured’, it means it is secured against something you own (an ‘asset’) – and failing to repay the loan could result in the lender taking possession of that asset, and selling it to cover their losses.

The asset in a secured loan will normally be your home, but it can also be your car or another item of a high value.

Advantages of a secured loan

It’s usually possible to borrow more than with an unsecured loan. It’s also possible to spread payments over a longer period of time. Since the lender knows they have your asset as backup, there is much less uncertainty about whether they are going to get all their money back.

For the same reason, interest rates are often lower.

Even if you have a bad credit history, you may be able to get a secured loan. Your secured asset will reassure lenders that they are able to get all their money back. However, if you currently have other debt problems, taking out further loans of any type could be a bad idea.

Unsecured loan

An unsecured loan does not require you to secure anything against the loan – the lender relies on your contractual obligation to pay it back. Because there is no security and the risk they are taking is therefore greater, the amount you can borrow tends to be less, and the repayment period is usually shorter. The lending criteria also tend to be tighter: lenders generally charge a higher interest rate which is determined mainly by your credit history and level of income.

Advantages of an unsecured loan

Preserves the equity in your property and avoid the risk of losing your home or assets. Lenders are not entitled to repossess your belongings if you struggle to make your payments – although they can attempt to pursue this in court if necessary.

You don’t need a property or any other expensive assets to take out an unsecured loan.

It’s cheaper than credit/store cards for smaller purchases. Credit and store cards usually have very high interest rates, so if you’re planning on repaying over a few months, you can save a lot of money by taking out an unsecured loan to fund your purchase.

 

Now let’s understand how to make the choice between the two.  Answer the following questions:

Which type of loan I should opt for?

• Which type of loan will save me rate of interest?

• Do I have any asset to mortgage?

• For how much duration do I need the credit?

• What is the end use of the finance I need? Is it commercial or personal?

Let’s take an example to clear the apprehension. Suppose you need loan / finance for your business. In that case, which loan should you go for? Secured business loan /unsecured business loan/ mortgage loan?

If you have any asset to pledge then you should make a choice between secured business loan and mortgage loan. Now we should compare on the following aspects:

Loan amount offered and needed in both the scenarios.

Rate of interest: Loan Against property will have comparatively lesser rate of interest than secured business loan.

End Use: In case of business loan the loan taken has to be specifically to be used for only business purpose as mentioned. But in Loan Against Property the loan taken can be used for any purpose like business, education, marriage etc.

Tenure is also a key point, which also varies for every type of loan.

Thus, Secured loans offer lower interest rates and better loan repayment terms, such as extended repayment options or variable interest rates. Secured loan borrowers can also often choose between a fixed and variable rate (Home Loan), as well as decide to pay nothing for the initial term of their loan. This ultimately means that secured loan applicants have greater financial flexibility and more savings options than unsecured borrowers.

Unsecured personal loan are better for those people who are in a need of instant financial assistance as these loans have a minimal paper work. The approval process is also very quick and there is no appraisal of the collateral item.

Before going any further and making any concrete decision you should be familiar to all the aspects of the both the type of loans. It all begins from choosing a suitable lender and deciding a fixed rate of interest, which you can repay comfortably. If all these factors go hand in hand then only the particular choice will be beneficial for you.

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