Secured and Unsecured Loans are useful for different financial needs. Secured Loans require collateral, which can be
property or land papers. This requirement reduces overall risk and helps in obtaining lower interest rates. Unsecured
Loans, on the other hand, do not require collateral. They are easily accessible and usually come with higher interest
rates.
What is a secured loan?
A Secured Loan requires you to provide collateral, such as property papers or your vehicle. This collateral is
considered a security for the lender, reducing the overall risk. Due to this security, you can acquire a Secured Loan
at lower interest rates and with easy repayment terms.
Examples of secured loans
- Mortgage/Home Loan
- Loan Against Property (LAP)
- Auto Loan
What is an unsecured loan?
An Unsecured Loan does not require collateral. This means the lender cannot take any assets if the borrower defaults.
These loans rely on your creditworthiness and income. Interest rates for these loans are usually high. The absence of
collateral leads to higher costs for securing the loan.
Examples of unsecured loans
Features of a secured loan
- Need for collateral: You must provide collateral, such as property or vehicle papers.
- Low interest rates: Because of collateral, Secured Loans are available at lower interest rates.
- Higher loan amounts: Based on your income, you can claim for larger sums of money, as the
collateral provides security to the lender.
- Flexible repayment terms: Secured Loans have flexibility and longer repayment periods, making
monthly instalments easier.
Features of an unsecured loan
- No collateral required: Unsecured Loans do not need any collateral to secure the loan.
- Quick approval process: The application process is faster and has fewer requirements so that you
can receive funds quickly.
- Flexible fund use: Funds can be used for various purposes, such as personal expenses, debt
payments, or other emergencies.
Difference between secured Loans and unsecured loans
| Aspect
|
Secured Loan |
Unsecured Loan |
| Collateral requirement |
Yes (Property, vehicle, etc.) |
No |
| Interest rates |
Lower due to less lender risk |
Higher due to increased risk |
| Loan amount |
Larger amounts available |
Smaller loan amounts |
| Repayment terms |
Longer repayment period |
Shorter repayment period |
| Failure action |
The lender can seize the collateral if you fail to repay the loan |
No asset seizure, but negatively affects credit score |
| Usage flexibility |
Used for fixed purposes like home purchase, etc. |
Can be used for various personal expenses |
Secured vs Unsecured loan: which is better?
The choice between a Secured and Unsecured Loan depends on individual financial needs and requirements. However,
Secured Loans are ideal if you seek lower interest rates and larger loan amounts, while Unsecured Loans offer
flexibility with collateral. So, depending on your credit score, repayment capacity, and the urgency of fund
requirements, you should decide which is better.
Also Read: What
is Home Loan Top-Up?
Conclusion
Secured Loans offer lower interest rates. You can borrow higher amounts with these loans. Unsecured Loans allow more
flexibility. You do not need collateral with these loans. In such cases, your financial situation matters a lot. Your
needs and risk tolerance affect your choice, and you must make Informed decisions.
Disclaimer: This article is for information purpose only. The views expressed in this article
are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or
the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking
any financial decisions based on the contents and information. Please consult your financial advisor before making
any financial decision.
