Loans can help you bridge monetary gaps in the short or long term, and allow you to choose a comfortable tenor to repay. While there are many types of loans you can get, there are two main categories of financing that you can avail of: secured and unsecured loans.
Today, you can get both these types of credit solutions on a loan app or an online financial marketplace with ease. Read on to know how secured and unsecured loans differ and how you can pick the best option for yourself.
Characteristics of Secured Loans
Secured loans are those that are secured by collateral. This means you need to pledge an asset as security to get financing against it. There are various assets you can attach as security for a loan, such as:
- Property or land
- Fixed Deposit or securities
- Gold jewellery, coins or bars
- Cars or bikes
- Machinery or equipment
- Raw materials or inventory
- Other tangible assets
As you can see, secured loans include home loans, loans against property, car loans, two-wheeler loans, gold loans and machinery loans. Here are some of their characteristics:
- The financing you get is against the value of the collateral as per the loan-to-value ratio
- The lender needs to verify and evaluate the collateral before disbursing funds
- Your assets are at risk as the lender has the right to seize them and auction them in case you are unable to repay
- The eligibility criteria are basic and simple to meet
- You can enjoy doorstep services from most lenders and can get the loan from the comfort of your home
- Timely repayment of such loans can help you boost your credit score and vice versa
Characteristics of Unsecured Loans
Unsecured loans are those that you can get without the need to pledge any asset as security. Thus, these loans are called collateral-free loans. Some examples of an unsecured loan are a personal loan, an education loan as well as certain business and professional loans.
Here are some of their characteristics:
- The financing that you can access is based on your income and earning capability
- They are easy to apply for as there are no formalities or hassles about risking your assets
- You need to meet stringent eligibility criteria and credit score requirements
- Like secured loans, repaying these loans in a disciplined manner can also help you improve your credit score
Differences between Secured and Unsecured Loans
Here are some standout differences between these two financing options.
| Point of difference | Secured Loans | Unsecured Loans |
| Interest rate | Is usually lower than unsecured loans as the lender’s risk is mitigated | Is usually higher than secured loans to make up for the lender’s risk |
| Risk factor | More as your assets can be forfeit | Less as you do not need to pledge any asset |
| Quantum of funding | Can be higher based on the value of the asset, up to ₹15 Crores | Is usually lower in comparison to secured loans, up to ₹50 Lakhs |
| Time to apply and get funds | Can take time as assets need to be verified by the lender | Are usually instant or very quick to apply for and receive funds |
| Eligibility terms | Usually basic and easy to meet | Usually strict and harder to qualify for affordable financing |
| Repayment tenors | Usually longer, up to 30 years | Usually shorter, up to 6 years |
| Required credit score | Usually 650 and up | Usually 750 and up |
How to Select the Best Option between Secured and Unsecured Loans
In order to choose between these options smartly, consider the following factors:
Availability of an asset: If you have assets in your name that are free of any litigation, you can consider a secured loan. If you are not comfortable risking it, choose an unsecured loan.
Required loan amount: If you are looking for a large loan amount for big-ticket expenses like a wedding or setting up a business, consider secured loans. However, remember that the loan amount depends on the value of the asset and may vary from 50% to 95%[EW1] LTV.
Urgency of financing: If you are looking for an instant loan, an unsecured loan may be the best option as it is a faster way to access funds. Some lenders may approve your application in less than 2 minutes, and you can get funds in your bank account in 2 hours post approval.
Credit score and income: If you have a high credit score and are earning a substantial and stable income, you can consider an unsecured loan. You may be able to get this type of loan at affordable rates if you meet and exceed the lender’s eligibility criteria. If not, you can get a secured loan even without a great credit score.
Repayment comfort: If you are looking for a longer repayment period, a secured loan may be better suited to your needs.
Use of funds: If you need funds to buy a home or car, a secured loan can help you do so with ease. If you need finances for a variety of personal expenses, then consider an unsecured loan.
As you can see, going for a secured vs unsecured loan depends entirely on your needs and comfort. One is not better than the other, and both have their own pros and cons. However, what you should do is calculate your EMIs and compare your options to make the right choice.
This is easy to do on the Bajaj Markets App, where you will find both secured and unsecured loans from a variety of top lenders. Download this loan app now from the App Store or Google Play and get the ideal financing for yourself.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.