By Priyanka Sambhav
From banks to non-banking financial institution(NBFC), lenders are all out offering various kinds of short-term and long-term loans. Right from a washing machine to a home, everything is available on loan. Personal loan, Consumer durable loan, education loan, auto loan, home loan- the array of loans is making every purchase possible. In this article, we will get to know about the difference between secured and unsecured loan with their benefits. Let’s have a look:
There are two broader categories of loans:
(a) Collateral based secured loans
(b) Non- collateral unsecured loans
What is a Secured Loan?
A secured loan is the sort of an arrangement that you must have seen in a number of Hindi movies made in the 70s and 80s. It basically requires you to put an asset as security for the money borrowed. This collateral is a surety, and if the borrower fails to repay the loan then the lender has some means to get back their money. The interest on a secured loan are lower as compared to non-collateral loans. A collateral could be your new property for which you are taking a home loan, or you can take a loan on an existing property which is owned by you , a vehicle, in certain banks a fixed deposit saved in their account, you can avail secured loans on certain insurance policies and even on your mutual funds. In case of your failure to repay the loan, this collateral is confiscated/auctioned by the bank or lending institution to repay the funds.
Examples of Secured loans- Home loan and Auto loan
What is Unsecured Loan?
An unsecured loan doesn’t require any piece of collateral or security. In case of default, the lender will have to initiate a legal proceeding to collect the funds. Unsecured loans are given on the basis of a borrower’s credit-worthiness, which depends on several factors like credit report and CIBIL score. The interest rate on such loans is usually higher due to the lack of collateral.
Examples of Unsecured loans- Credit cards, Personal loans and Educational loans.
5 Key Difference between Secured and Unsecured Loan
1. Secured loans are sanctioned on submission of collateral, unsecured loans don’t require that.
2. Rate of Interest for unsecured loans is usually higher than secured loans.
3. Secured loans are easier to obtain than unsecured loans.
4. Secured loans usually have longer repayment periods as compared to unsecured loans.
5. Unsecured loans are usually sanctioned for a lesser amount than secured loans.
Which One Is More Beneficial?
Simply by virtue of lower interest rates and longer repayment periods, secured loans are preferred by the most. Even lenders also often encourage borrowers to take secured loans. The risk is lower in extending secured loans as compared to unsecured loans.
