Know the difference between Secured and Unsecured Loans

Loans help individuals tide over a financial crunch. There are two types of financial loans: a secured loan and an unsecured loan. While both of them help individuals tide over a particular financial need, certain aspects vary when it comes to both types of loans. 

A secured loan is when a borrower has to offer collateral against the funds. While availing unsecured loans, on the other hand, there is no requirement to provide collateral against the funds.

There are various pros and cons of both secured and unsecured loans. Knowing the difference between the two is important for anyone who is planning on availing one.

Secure Loan

What is a Secured Loan?

By definition, a secured loan is backed by collateral. The borrower will have to keep some form of an asset as a guarantee against the funds lent by the financial institution. 

A borrower can pledge his house, gold, vehicles, as well as fixed deposits against the borrowed funds. The value of the pledged asset has to correspond with the value of the loan. This security is kept with the financial institution until the loan has been paid off. If the borrower defaults on the loan, the asset used as collateral is liquidated to recover the outstanding amount. 

There are various types of secured loans; including a home renovation loan, vehicle loan, gold loan, loan against fixed deposits, etc.

Pros and Cons of a Secured Loan

There are various pros and cons of a secured loan:

Pros: 

  • Tenure: The tenure of a secured personal loan is greater as compared to an unsecured personal. The tenure of a secured home loan can be as long as 20 years. This gives the borrower more time to repay the loan as the tenure is spread out over a longer period.

  • Lower interest rate: Secured loan interest rates are lower as compared to other forms of credit borrowings.

  • Borrowing Limits: The borrowing limit of secured personal loans are higher as compared to unsecured loans. 

Cons: 

  • Loss of collateral: Failure to repay the secured loan amount along with the interest can cause loss of collateral. Not only could you face a loss of assets, but the chances of a reduced credit rating are also high.
Unsecured Loan

What is an Unsecured Loan?

An unsecured personal loan is a type of borrowing where you do not need security or collateral against the borrowed funds. Borrowers can avail a loan based on their needs and the occasion. 

Since unsecured personal loans do not require any guarantee, borrowers need to have a high credit score. This helps the lender to assess if you can repay the loan or not.

Pros and Cons of an Unsecured Loan

Before availing an unsecured personal loan, there are a few pros and cons that you should know about: 

Pros: 

  • Quick disbursal: If you are eligible for an unsecured personal loan, the disbursal of funds is quick. At Finnable, personal loan are disbursed within 6 hours of approval of the loan.
  • No collateral: An unsecured personal loan does not require any type of collateral or security. Due to this factor itself, an unsecured personal loan is a worthwhile option for those who do not wish to part with an asset. 
  • Multiple purpose/Use: Unlike a secured loan, an unsecured personal loan can be used for multiple purposes. You can avail of an unsecured personal loan to travel, to cover wedding expenses, unforeseen medical emergencies, to buy appliances, and even for home renovation. 

Cons: 

  • Stringent eligibility: The eligibility of an unsecured personal loan depends on the credit score of an individual. 
  • Smaller loan amount: While it may be less difficult to apply and avail of an unsecured loan, the amount given out as a loan is smaller. 
  • High interest rate: Being a loan without any collateral or security, the interest rate of unsecured personal loans are usually higher compared to secured loans.
  • Short tenure: The tenure of unsecured personal loans can be from 1 to 5 years, depending on the loan amount. 

Secured Loan vs. Unsecured Loan

 

Secured Personal Loan 

Unsecured Personal Loan

Definition

A loan that requires collateral against the loan amount. The collateral has to correspond to the amount availed.

A loan that does not require any collateral or security against the amount availed as a loan. 

Examples

Home loan, vehicle loan.

Wedding loan, education personal loan, house renovation loan, travel loan, medical loan.

Tenure

High tenure.

Low tenure of 6 to 60 months.

Interest Rate

Low interest rate.

High interest rate.

Amount

The amount can be high depending on the loan.

Amount tends to be lower as compared to secured personal loans.

Disbursal Time

Disbursal of funds is done once all documents including the collateral is verified.

Disbursal time is short and quick. Funds can be disbursed within 6 hours of document verification. 

What type of loan is right for you?

How do you decide which loan is right for you? This factor depends on the purpose of the loan itself as well as your repayment capability.

If you are a borrower looking for a specific secure loan like a home loan and are willing to keep collateral, a secured loan can be the solution for you.

However, if you need funds to tide over a medical emergency, travel expenses, or any other short-term purpose, an unsecured personal loan is the answer for you.

We, at Finnable, offer quick and fast disbursal of unsecured personal loans that can help you overcome a financial emergency. Our loans are offered at competitive interest rates. 

Borrowers can use Finnable’s unsecured personal loans for travel, wedding, home renovation and medical emergencies as well. 

With a simple documentation process and high loan amounts, our unsecured personal loans are disbursed within 6 hours of document verification.

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