When it comes to borrowing money, various options are available to meet your financial needs. Two popular types of loans in India are secured loans and unsecured loans. It’s crucial to comprehend the distinction between these loan types to make informed financial choices.
What are secured loans?
Secured loans are loans backed by collateral, an asset you own. The collateral provides security to the lender in case you default on your loan repayment. Examples of assets commonly used as collateral include real estate properties, vehicles, or even valuable possessions like jewellery or investments.
Features of secured loans:
- Collateral requirement: If you decide to take out these loans, you will need to offer an asset as collateral to ensure the loan is guaranteed. This collateral serves as a safety net for the lender, reducing the risk of lending money.
- Higher loan amounts: Since secured loans have collateral, lenders are willing to offer higher loan amounts than unsecured loans. The value of the collateral typically determines the loan
- Lower interest rates: Secured loans often come with lower interest rates than unsecured ones. When borrowers offer collateral, it reduces the risk for lenders. This makes them more willing to offer lower interest rates.
- Longer repayment terms: Secured loans generally have longer repayment terms, allowing borrowers to repay the loan over an extended period. This can help in managing monthly repayments more comfortably.
What are unsecured loans?
Unsecured loans are loans that do not require any collateral. These loans are based solely on the borrower’s creditworthiness, income, and other factors determined by the lender. Since no collateral is involved, unsecured loans pose a higher risk to the lenders, resulting in higher interest rates than secured loans.
Features of unsecured loans:
- No collateral required: These loans do not require any collateral, making them accessible to borrowers who do not possess valuable assets to pledge.
- High-interest rates: Lenders consider unsecured loans riskier, which is why they usually come with high-interest rates.
- Lower loan amounts: Lenders face a higher risk without collateral, so they may limit the loan amount offered for unsecured loans.
- Shorter repayment terms: Unsecured loans often have shorter repayment terms compared to secured loans, requiring borrowers to repay the loan within a short period of time.
Difference between secured and unsecured loans
|Secured Loans||Unsecured Loans|
|Collateral||Require collateral||No collateral required|
To wrap up
Secured loans and unsecured loans are two distinct options available to borrowers in India. Secured loans require you to put a collateral, including things like your home or car. Loans that require collateral generally have long repayment terms, low interest rates, and good loan amounts.
However, unsecured loans don’t require any collateral. Still, they typically have shorter repayment terms, lower loan amounts, and higher personal loan interest rates. Remember, understanding the difference between these loan types empowers you to make a well-informed choice that aligns with your financial goals and requirements.