What Is The Difference Between Secured And Unsecured Loans?

There are many reasons why you may need to borrow money- you may want to buy a house, there may be medical expenses to meet, you may want to send your child abroad to study…. Borrowing money from friends and family may seem cheaper than taking a loan from the bank but this has the risk of spoiling relationships. 

So, when it comes to borrowing money, it’s always better to approach a bank. Loans can be broadly classified as secured and unsecured loans. Knowing the difference will help you choose the loan best suited to your needs.

What is a secured loan?

A loan that is connected to a valuable physical asset is termed as a secured loan. In the case of a secured loan, if the borrower defaults on repayment of the loan, the bank can take possession of the asset used as collateral. 

These assets may then be sold to repay the outstanding debt. Property, gold and a car are the most common assets used as collateral. Once the loan is repaid in full, the collateral held by the bank is returned to the borrower. 

For example, if you were to take a loan against gold, you would have to give the bank a certain amount of gold in the form of jewelry or gold bars/coins as collateral. After the loan was repaid completely, this gold would be returned to you. However, if you are unable to repay the entire amount, a portion or all of the gold may be kept by the bank. 

Common types of secured loans: 

  • car loans
  • home loans

What is an unsecured loan?

A loan that is not protected by any collateral is known as an unsecured loan. In such cases, the bank cannot possess the borrower’s possessions if he or she defaults on payments. 

Common types of unsecured loans: 

  • student loans
  • personal loans

Secured vs unsecured loans: interest rates

Since banks have collateral against which a loan is issued for secured loans, these loans have a lower rate of interest as compared to unsecured loans. For example, the gold loan interest rate is between 11% and 12%. However, a personal loan interest rate can go up to 13.99%. 

Secured loans also have a higher borrowing limit as compared to unsecured loans. 

Secured vs unsecured loans: repayment 

In the case of secured loans, the banks hold collateral through which they can repay any outstanding debt. Hence, such loans usually have a longer repayment period. This also means that the EMIs payable is lower in the case of secured loans as compared to unsecured loans. 

Which loan is easier to get?

Secured loans put a lower risk on the lending agencies and hence are often easier to get. However, this is not the only criteria. A person’s credit rating also plays a major role in determining the type of loan they are eligible for. People with a poor credit history are more likely to be offered a secured loan instead of an unsecured loan. 

Are secured loans risky for borrowers?

As long as you can pay back the borrowed amount and the interest in it, there is no risk of losing your assets. Secured loans are often preferred because they offer lower interest rates and longer repayment schedules. 

This blog is maintained by the Finaura team. Finaura is a solution that will help you find the best gold loan solution from gold loan company nearest to you. If you have any queries please feel free to contact us. Call us on +91 484 2388285 or email us at [email protected]

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