When you are looking to borrow money, you must decide whether to opt for a Secured or an Unsecured Loan. These are available at most lending institutions online, and their approval depends on your income, eligibility, repayment capacity, Loan amount, employment history, etc.
What is an Unsecured Loan?
Unsecured Loans do not involve collateral, such as Personal Loans. Credit Cards, Small, Unsecured Personal Loans, and Student Loans are a few examples of this type of Loan. Personal Loans without collateral are also widely available.
You typically need a stable income and a healthy credit history to get low Personal Loan interest rates. Lenders take more risk in this type of funding as there is no asset to recover in case of a default. Therefore, the interest rates are higher. These are yardsticks to assess a borrower’s ability to repay the debt and can include their situation as well as general economic factors.
What is a Secured Loan?
When a borrower pledges an asset to secure a Loan, it is called a Secured Loan. If the borrower cannot repay the Loan, the lender can repossess the pledged asset to recover their dues. Certain Loans, such as Loans Against Securities, require borrowers to pledge financial assets, such as Mutual Funds, Shares, Bonds, etc., as collateral.
Borrowers opt for Secured Loans when they require a large amount at a lower interest rate and a longer tenure. They pledge an asset, such as a car, property, Equity, etc., against that Loan. The Loan amount made available is usually based on the value of the collateral. Though lenders repossess the collateralised property, you may still owe them money in some cases.
The lender would sell the property and use the funds raised to square off the debt. Now, if the property’s market value turns out to be lower than the outstanding Loan amount, you would pay the rest out of pocket.
Are the interest rates different?
The Personal Loan interest rates are generally different for Secured and Unsecured Loans. You can avail of these online, starting from 13% per annum, with amounts of up to Rs. 30 lakhs for up to five years. Their disbursement period is faster than that of Secured Loans.
On the other hand, Secured Loans come with low interest rates for a tenure of 15 to 30 years, more documentation requirements, and higher Loan amounts. Depending on your situation and requirements, you can make your choice.
Conclusion
If you need a large Loan amount and would like a longer tenure to manage EMI payments without facing any financial stress, a Secured Loan would be a good option. On the other hand, if you need finances in less than a week and would like to speed up the process, an Unsecured Loan would be better.
