There are mainly two types of loans in the loan and financial market: secured and unsecured loans. An individual should know the basic difference between the two as these things help the person to achieve their goals very quickly and also help to get rid of financial risks.
On the one hand, where secured loan needs the borrower to provide a specific amount or asset as security or collateral, on which the loan will be offered. On the other hand, an unsecured loan doesn’t have some requirements and needs of security. It will affect your loan borrowing limit, terms of repayment, and rate of interest.
People think which loan should be chosen for easy repayment and financial assistance. Both have their pros and cons.
Let’s know about secured and unsecured loans in detail, and which one is better to choose. Read all the points very carefully:
Secured Vs Unsecured Loans
Secured Loan
It’s a loan which needs some security amount or asset on which loans are given by the lender or the bank. This loan is safeguarded through an asset. It consists of car loans, home loans, business loans, etc. The item purchased on the secured loan like a car or home can be considered a collateral asset or value. In this case, the lender will hold the genuine sales deed and other documents until you pay the full amount with an interest rate. It is generally seen in home loans. Other things can have their own guidelines and policies. They use collateral like stocks, bonds and money value. If you want to borrow a large amount to tackle a financial crisis, you should choose a Secured loan. The bank or the lender will provide you with a large sum with a commitment that you have to pay the loan amount with interest.
Secured loans aren’t meant for some purchases. It may be in the form of credit, line or particular overdraft. It will be based on the existing value of your home, by deduction of the amount for the loan you have in your hand. These loans are provided against your home or any collateral amount.
Benefits of Secured Loans
- Low rate of interest
- Long-term repayment tenure
- Higher limitation for borrowing
- Greater processing time
- Specimen of Secured Loan
- There are various types of secured loans like mortgages, home equity, auto loans, and business. All have their own requirement and benefits for financial assistance.
Unsecured Loans
This type of loan doesn’t offer any security amount or asset. It includes several types of loans like credit cards, and personal loans. Lenders have several risks because there is no asset or security amount to recover. It’s the reason, that interest rates are higher than secured loans. The lender of banker will check for the credibility of your credit score and the capacity that you can repay your loan on time or not. Unsecured loans can be converted into short-term personal loan circumstances if you have a good CIBIL score.
The bank. Financial agency or your lender will judge you based on your:
Capacity: It includes your current monthly income and existing debts
Loyalty: It consists of various things like employment history, credit score and other related references.
Capital in hand: Your savings in your bank
Terms and conditions: Everyone should abide by the terms and conditions of the loan.
Attributes of unsecured loans
- There are several advantages of having a secured loan. It consists:
- Higher interest rates
- Since there is no collateral or security, it has a very low borrowing limit
- Short-term personal loans, as its range from 5 and up to 7 years
- Quick processing as compared to a secured loan
Unsecured loans examples
Credit cards, personal loans, personal lines of credit, student loans etc.
Summary
There are two types of loans in the market: secured and unsecured loans. Secured loans need collateral and security amounts and are available at low interest rates. It may be prone to risks as non-payment of dues may lead to the seizure of your account or your asset. Car loan, and home loan are the kinds of Secured loans.
On the other, unsecured loans like Personal loans don’t require any sort of collateral or security amount. It’s not very risky but its rate of interest is very high. Credit cards and Personal loans are the forms of unsecured loans.