What is a Secured and Unsecured Loan? Understand the Key Difference

When applying for a loan, the choice between secured and unsecured loan options plays an important role in determining the approval terms, cost of borrowing, and associated risk. The applications for a secured and unsecured loan are completely different, and if one misses the distinction between them, then it can lead to mismatched expectations during the loan process.

A secured loan is backed by collateral or a valuable asset, whereas an unsecured loan is not backed by any asset. There is a risk of losing the pledged asset in case of non-repayment on secured loans. So, let’s understand in detail the difference between secured and unsecured loans.

What are Secured and Unsecured Loans?

A secured loan is a type of loan where you provide something of value that you own to the lender, like gold or property, as a form of assurance to the lender. The lender assesses its value and, accordingly, processes the loan amount.

However, in the case of an unsecured loan, there is no need to offer anything you own to the lender. The decision of loan approval relies on your income, credit score & history, and repayment behaviour to approve the loan.

How Does a Secured and Unsecured Personal Loan Work?

Lending works on a simple principle: a lender, like banks, NBFCs, and even unregulated lenders, gives you funds with the expectation that you will repay them over time, along with interest. And to make the decision, whether to lend the money or not, the lender evaluates the level of risk involved in giving you that money.

So, in the case of secured loans, the risk to the lender reduces as you provide something of value as backup. If you are unable to repay the principal amount with interest, the lender can recover the amount by selling or auctioning the valuable asset that you have pledged.

This makes the process of applying for a loan easier, and it can be approved easily as well.

However, in the case of unsecured loans, there is no backup to recover money in case of non-repayment. Hence, the process of applying for an unsecured loan and its approval is difficult. The lenders thoroughly check your financial profile and credit behaviour before approving any request.

Difference Between a Secured and an Unsecured Loan

This table highlights the key differences between secured and unsecured loans:

What can be used as Collateral in Secured Loans?

Lenders often set specific requirements for what can be used as collateral, depending on the loan type. Like, a Gold Loan requires gold jewellery or ornaments, and a home loan means pledging your home as collateral. However, here is the list of assets that can be used as collateral:

• Real estate, like a home or property
• Stocks, mutual funds, FDs, or bond investments
• Gold jewellery and ornaments
• Cars, trucks, and other vehicles
• Insurance policies, like life insurance

What Happens in Case of Default on Secured and Unsecured Loans?

In case of non-repayment, the consequence depends on the type of loan. Defaulting on a secured loan can lead to financial and legal repercussions, such as:

• The lender has the right to take possession of the pledged asset.
• In the case of a loan against property, the lender may start the foreclosure proceedings to recover the outstanding loan amount.
• The seized asset can be sold by the lender to recover the outstanding loan amount.
• Defaults may also lead to penalties, additional interest rates, and a negative impact on your credit score.

However, in the case of unsecured loans or personal loans, the default is reported by the lender to the credit bureau, and your credit score is severely affected. The low score makes it difficult for the individual to apply for any loans in future. Lenders initiate the loan recovery process after 90 days to resolve the issue, which may include continuous follow-ups and involvement of collection agencies.

And if the loan remains unpaid even after 180 days, the lender can file a case against the borrower. If the court rules in favour of the lender, then the court might order the lender to seize the borrower’s assets and sell them as directed.

Read Also: Legal Action Against Personal Loan Defaulters

Which Loan Should You Choose?

If you are applying for a loan, lenders might offer both secured and unsecured loans. After understanding the difference between secured and unsecured loans, let’s make it simple to decide which one to choose, depending on your situation.

Apply for a secured loan when:

• You need a higher loan amount at lower interest rates
• Your credit score is low, or you are new to credit
• You are confident about repayment

Apply for an unsecured loan when:

• You do not want to risk anything you own
• You need access to funds urgently
• You have a strong credit score and profile
• The loan amount is moderate, and you can manage higher interest rates

This checklist will help you decide whether to go for an unsecured or a secured Personal Loan.

To Conclude

Both secured loans and unsecured loans serve different purposes for different financial needs. Before choosing between them, you need to have a clear vision of what you need, as well as your capacity to repay and your risk appetite.

While secured loans are cost-effective and suitable for larger financial needs, unsecured loans offer speed and convenience. If you are in need of financial assistance, Poonawalla Fincorp offers flexible secured and unsecured loans at competitive rates and a simple documentation process.

Explore Poonawalla Fincorp's unsecured Personal Loan  offerings and apply today to get quick access to collateral-free funds with a seamless borrowing experience.

FAQs

What is the main difference between a secured loan and an unsecured loan?

The main difference is collateral. Secured loans require an asset, while unsecured loans do not.

Which loan type is easier to get approval for?

Secured loans are generally easier to get approved due to lower risk for lenders. Secured loans require more verification and legal processes to get the loan amount approved.

Do unsecured loans have higher interest rates?

Yes, unsecured loans usually have higher interest rates due to the absence of collateral.

Is a Personal Loan secured or unsecured?

A Personal Loan is typically an unsecured Loan. However, financial institutions and lenders might offer secured options in case the individual has weak creditworthiness and needs access to funds urgently.

Which loan is better for emergencies?

An unsecured Personal Loan is better for emergencies due to faster processing and no collateral requirement.