Difference Between Secured and Unsecured Personal Loan

If you're planning to borrow money, it is essential to understand the distinction between secured and unsecured personal loans. Both loan types will help you meet your unique financial needs. However, they differ mainly in collateral requirements. You need to pledge an asset for a secured loan, whereas unsecured loans are based on your creditworthiness.

In this blog, we will explore the differences between them in detail to select the most appropriate one according to your financial needs.

What is a Secured Loan? 

Secured loans require the borrower to pledge an asset as collateral for the loan. This could be a home, car, savings, or other personal property. If the borrower defaults, the lender can seize and utilise the pledged asset to recover the unpaid amount.

Examples of secured loans include home equity loans, auto loans, and certain business loans. Financial institutions often offer higher loan amounts for those backed by collateral.

What is an Unsecured Loan?

An unsecured loan is a type of loan that is collateral-free, meaning you can borrow money without having to pledge any asset or property. Approval is based on your credit score, income stability, and overall financial health.

Since the lender assumes more risk compared to a secured loan, interest rates are usually higher, and the repayment period may be shorter.

Understanding Collateral and Its Importance in Loans

The borrower's collateral is an asset of value provided to a lender as security. For example, collateral can take the form of real estate, jewellery, a car, or a fixed deposit. In the case of a secured loan, the collateral ensures that the lender can take possession of or sell the item to recover the overdue amount.

Collateral is significant when a borrower wants a large sum of money, has a limited credit history, or has a low credit score. It also allows borrowers to access lower interest rates, as a tangible asset backs the loan.

If you prefer not to pledge your assets, it may be safer to opt for a loan without collateral. This option offers peace of mind and convenience; however, it may come with slightly higher interest rates.

Key Differences Between Secured and Unsecured Loans

Here’s a quick comparison to help you decide which loan is best suited for your needs:

Which Type of Loan Should You Choose?

When deciding between secured and unsecured loans, consider your current financial position, your ability to repay, and your goals.

Choose a secured loan if:

• You have valuable assets that can be pledged as collateral.

• You want to obtain a larger loan amount.

• You prefer lower interest rates and longer repayment periods.

Consider an unsecured loan if:

• You need funds urgently.

• You do not wish to risk your property or savings.

• You have a good credit score and a stable income.

Both can be safe options when you borrow responsibly and make timely repayments. They can help you build creditworthiness and achieve your financial goals.

To Conclude

Both secured and unsecured personal loans serve distinct financial purposes. A secured loan can be a practical loan option when you have collateral and seek lower interest rates or a higher loan amount. An unsecured loan is also a wise choice, offering flexibility and convenience for borrowers who prefer not to pledge collateral. Assess your finances, repayment ability, and risk tolerance to determine which loan best suits your needs.

Want an unsecured Personal Loan? Connect with Poonawalla Fincorp and get a loan at affordable rates with no collateral needed. Apply now!

Read Also: Unsecured Loans: Types, Benefits, Features and Interest Rates

FAQs

What determines if a loan is secured or unsecured?

A loan is secured when it’s backed by collateral, such as a house or vehicle, which the lender can claim if you default. It’s unsecured when no collateral is involved, and approval depends on your credit score and income profile.

Can I obtain a Personal Loan without collateral?

Yes, a Personal Loan is generally an unsecured loan. Eligibility depends on your credit score and income level, without requiring any asset pledges.

Are secured loans always at a lower interest rate?

In general, yes. Since the lender has an asset pledged as security, the interest rate is usually lower than that of an unsecured loan. However, if you miss payments, the pledged asset can be seized.

Which loan is faster to get approved?

An unsecured Personal Loan is usually faster to get approved, as it doesn't require collateral. It is better suited for urgent situations that require quick access to funding.

Does using an unsecured loan affect my credit score?

Yes, an unsecured loan can affect your credit score. Making timely payments can improve your score, while missed or late payments can lower it. It’s essential to manage repayments responsibly, just like it is to maintain insurance, to maintain a healthy credit profile.