Secured Loan Vs. Unsecured Loan: What is the Difference?

Feb 18, 2020Other Loans

A secured loan is typically a better option than an unsecured loan as it has easier eligibility criteria, has a lower interest rate and allows you to borrow a higher amount. The only downside is that the lender can repossess your property in case of default.

When you are looking to borrow money, you will have to decide whether to opt for a secured loan or an unsecured loan. If you are wondering what is the difference between the two – read on to find out, and we also offer a few tips on how to choose between them.

What is a Secured Loan?

A secured loan is a loan connected to collateral. A collateral is something of value like a car or a house or equity shares. A lender has the right to take possession of the collateral if you fail to repay the loan as agreed. The most common examples of secured loans are car loan and a mortgage loan. You can also apply for secured personal loan online with Fullerton India - we offer home loans, loan against property as well as loan against securities.

Even though lenders repossess the collateralized property, you may still end up owing money to them 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 have to pay the rest out of your pocket.

What is an Unsecured Loan?

An unsecured loan is not backed by collateral. If you default on such a loan, the lender cannot automatically take possession of your property to repay the same. Credit cards, student loans, and small unsecured personal 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 an unsecured loan.

Must Read: What are the Types of Unsecured Loans?

Differences Between Secured and Unsecured Loans

The following table gives a rough idea about the basic differences between a secured and an unsecured loan in comparison to each other.

DETAILS

SECURED LOAN

UNSECURED LOAN

Loan Amount

High

Low

Collateral

Required

Not required

Tenure

15 – 30 years

up to 5 years

Interest Rates

Low

High

Documentation

More documents required

Fewer documents required

Speed of Disbursement

Slower

Very fast

Examples

Loan against property, Home Loan, Car loan, etc.

Personal Loan, unsecured business loans, credit card purchases, etc.

Conclusion

Thus, both secured and unsecured loans have their merits and demerits, and depending on your individual situation and requirement, you can make your choice. For instance, if you need a large loan amount and would like a longer tenure so as to be able to manage EMI payments without facing any financial stress, a secured loan would be a good option. On the other hand, if you are in urgent need of finances (less than a week) and would like to speed up the process, an unsecured loan would be the better choice.

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