Many of us have to rely on credit to finance big-ticket items like a vehicle, home, or marriage. These items can be financed by taking a loan. There are several types of loans in the market that serve a specific purpose. A car loan can be used by the borrower to buy a car whereas an education loan can be used to financially aid the borrower’s education. We can categorize loans as secured and unsecured loans. Both loans have their pros and cons. Let’s understand more about these loans and their differences in this article.
What is a secured loan?
A secured loan requires the borrower to present collateral in order to get the loan amount. The collateral serves as a guarantee for the lender in case of non-payment of the loan amount. A secured loan is less risky for the lender as there’s an assurance of repayment due to the collateral. If the borrower fails to pay the loan amount, the lender can seize the collateral.
When you take a secured loan, the collateral’s lien is under the bank’s name. Once you clear off the loan against it, the ownership of the collateral is transferred to you. Since secure loans offer lenders a repayment guarantee, the interest rates are much lower than an unsecured loan. Education loans, car loans, and gold loans are a few examples of secured loans.
Related read: Personal Loans for Students in India
What is an unsecured loan?
An unsecured loan is the opposite of a secured loan. The borrower doesn’t have to present any collateral to the lender in order to get the loan amount. Lender’s risk is much higher for an unsecured loan. The absence of collateral or security doesn’t assure the lender of full repayment of the loan. Therefore, unsecured loans attract higher interest rates.
However, the creditor or the lender does a thorough check about your payment history, employment details, credit score, and more to assess your creditworthiness. Only when the creditor is satisfied with your past credit history, the loan will be sanctioned.
An unsecured loan is a great option for people looking for emergency funds or a small number of funds for personal use. Personal loans from Airtel Flexi Credit are a type of unsecured loan with low-interest rates, processing fees, and flexible tenure.
Now that you have an understanding of secured and unsecured loans, let’s move on to the differences.
Secured Loan vs Unsecured Loan: Differences
Refer to the below table to understand the difference between a secured and unsecured loan.
|Basis of Difference||Secured Loans||Unsecured Loans|
|Collateral||Secured loans require the borrower to present collateral.||Unsecured loans don’t require the borrower to present collateral.|
|Interest Rates||The interest rate charged is lower due to the presence of security.||Interest rates charged are higher than secured loans due to the absence of security.|
|The application process||Slightly easier process for application and approval.||Strict process for application and approval.|
|Loan tenure||Long loan tenure for repayment.||Short loan tenure for repayment.|
|Risk||The borrower’s risk is higher.||The lender’s risk is higher.|
|Loan amount||The maximum loan granted is higher than unsecured loans.||The maximum loan amount granted is lower than secured loans.|
|Risk of losing assets||Collateral can be seized in case of default on payment.||No risk of losing any collateral if the borrower defaults on payment.|
|Purpose||Car, home, education, and more.||Personal use – marriage, home renovation, etc.|
Given that you have an understanding of the differences between secured and unsecured loans, analyze your commitments and purpose, and choose the right kind of loan to finance your dreams.
Which loan is better? Secured or Unsecured?
There’s no right or wrong answer. It actually depends on your financial situation and your needs. Your unique capacity as a borrower and your needs will help you to answer this question.
If you are looking for low-interest rates and longer loan tenure, secured loans are the best option for you. Remember that a secured loan keeps collateral at risk. Therefore, if you are sure that you are capable of making every payment on time, go ahead with a secured loan. Possession of the collateral by the creditor can affect your credit score and report for years.
However, if you are looking to borrow money and don’t have security to put in the bank, opt for an unsecured loan. Make sure to maintain a good credit score and a stable source of income to get the loan. Any score above 700 or 750 can get you a personal loan disbursed within 24 hours with personal loans from Airtel Flexi Credit. And, you can also pay back your due amount with easy and flexible personal loan EMIs!
Finance that dream wedding or your dream home today with secured or unsecured loans!
Also read: Best Credit Cards for Beginners in India