Difference Between Secured and Unsecured Loans

A loan is one of the best ways to finance your dreams or meet sudden expenses. There are several types of loans available in the market today that serve various purposes. For example, a car loan is designed to finance the purchase of your dream vehicle whereas a home loan is curated to help you buy a house. You can also opt for a personal loan that has no restriction on the end use. Now, each of these different loans are categorised based on security charged with the lender. Accordingly, your loan may be classified as secured or unsecured. Let’s gain a deeper understanding of the differences between secured and unsecured loan types.

What is secured loan?

A secured loan is a type of loan that requires you to provide Security i.e. tangible security properly charged to the Bank and do not include intangible securities such as guarantees to the lender if you want to borrow money from them. Real estate, vehicles, securities, jewellery, and other such assets of high monetary value are accepted by the banks as collateral.

Secured loans generally help borrowers enjoy a comparatively lower rate of interest and lenient borrowing terms. This is because collateral-backed loans are usually less risky for the lender as they have an assurance of repayment.

However, life is unpredictable and there may be times when you do not have enough money to make the monthly EMI payment. If you default on the EMI payments of a secured loan, the lender has the legal right to take possession of the collateral. This is done so that the lender may recover the money that you borrowed from them. Fortunately, lenders typically provide a three-month duration for you to clear off all your defaults and get back on track with your EMI payments.

What is unsecured loan?

An unsecured type of loan does not require you to provide any Tangible security to the lender when taking a loan from them. These may have comparatively higher interest rates as compared to secured loans due to the absence of security. The creditor grants you the loan mainly by assessing your ability to repay the debt. This is done by analysing your bank account statements and CIBIL score, among other factors. Having a stable source of income can help you procure an unsecured loan with ease. A stable employment history along with references are also considered by banks when reviewing your application for an unsecured loan. Lenders also take into consideration your monthly income in combination with your existing debts. This helps them accurately understand your financial capacity for repaying the loan.

An unsecured loan is a great option for people who need to borrow money but have no collateral to pledge. Thus, even if you do not have assets like a home or jewellery, you can still get the funding that you need.

Difference between secured and unsecured loan

Let’s sum up the differences between secured and unsecured loans in a table:

Secured vs unsecured loan: Which is better?

Now, you may wonder which is the better option between these two types of loans. Honestly, there is no right or wrong answer as the loan choice depends on your unique needs and capacity as a borrower.

Opting for a secured loan, also known as a collateral loan, is beneficial if you are seeking a relatively lower rate of interest to pay and want to enjoy a longer loan tenure. On the other hand, an unsecured loan is the apt choice for individuals who are looking to borrow money but do not have any tangible security to offer to the lender. If you have a good credit score and a stable source of income, an unsecured loan can be procured quite easily.

Types of secured loan and unsecured loans

Secured loan example

Here are some of the main types of secured loans available:

Car loans

These loans are designed to help you finance the purchase of a car. You need to make a certain percentage of down payment and the lender finances the rest. Lenders generally finance up to 90% of the car loan

Home loans

A home loan can be taken to buy new property or even to renovate your existing home. The home itself is the collateral in this loan. Lenders usually finance up to 90% of the value of cost of house / flat in a home loan

Gold loan

True to its name, a gold loan is a loan that is given against gold that you keep with the lender as collateral. Once you pay off the loan, you get your gold back. If you default or cannot pay, the lender make keep the gold to recover their dues.

Unsecured loan example

There are many types of unsecured loans as well. Here are a few examples:

Personal loans

Personal loans can typically be taken for a sum up to Rs. 15 lakhs. These loans do not require you to provide capital and usually charge a higher rate of interest. Personal loans can be used for various purposes and there is no restriction on how you spend the money. For instance, you may take a personal loan to consolidate many smaller loans or to pay for sudden expenses that come your way.

Education loans

These loans are used by students to pay for their college fees and finance their living expenses while at university or college. Do note that student loans taken for a larger sum of money may require you to produce collateral to the lender. This collateral could be property, gold or any other assets deemed as acceptable by the lender.

Conclusion:

Thus, we can see how a secured and unsecured loan can each offer you unique benefits and help you get the funding you need. Bank of Baroda offers several types of secured and unsecured loans on simple terms. Our loans have some of the most attractive rates of interest so that borrowing becomes easy. You can even apply for loans on our website and use our EMI calculators to understand your payments. We have an expert team of highly knowledgeable customer service agents who can help you clear all your queries. Get in touch with us today to get the funding you need in a simple, hassle-free process.