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Secured loan vs Unsecured loan - which one should you go for?

3 min read

Jul 21, 2021

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Choosing between a secured or unsecured loan depends on your funding requirements and urgency. Opting for a personal loan is common when you need quick access to funds, typically processed swiftly within a few days. However, if the prospect of securing a loan with an asset you own, thus potentially acquiring a lower interest rate, appeals to you, then a secured loan might be worth considering. Keep in mind that secured loans typically involve a more extended approval process and may necessitate additional documentation compared to the quicker, less paperwork-intensive nature of personal loans.

What are the differences between Secured and Unsecured Loans

Secured Loan	Unsecured Loan
Secured by pledged collateral or asset	Not supported by any collateral
Generally offers a lower interest rate	Typically charges a higher interest rate
Processing time may be longer due to collateral valuation	Faster processing without collateral valuation
Approval based on asset value, borrower's income, and existing loans	Approval is subject to the borrower's income, credit score, and existing loans
Available with a low credit score	Requires a high credit score for approval
Loan amount linked to collateral value	Loan amount linked to borrower's income and repayment capability
Available for extended repayment periods	Often has shorter repayment terms
Examples: Property-backed loans, Gold Loans, Securities-backed loans, FD- backed loans	Examples: Personal Loans, Limited amount Education Loans

What is a Secured Loan?

A secured loan involves offering collateral or security to the lender in exchange for the loan. Collateral can be a tangible asset like property, a vehicle, jewellery or a financial asset such as stocks, fixed deposits, mutual funds, or insurance policies. The bank retains possession or a lien on the security until the loan is fully repaid. If you fail to repay the loan the bank may sell the collateral to recover the borrowed amount.

You will also need to monitor the value of the security regularly. If the value of the security decreases, the bank may ask you to repay a certain part of the loan or increase your monthly repayment amount.

What is an Unsecured Loan?

An unsecured loan doesn't require any collateral. Instead, it's based solely on your credit history and score. The bank will evaluate factors like repayment history, steady income, and documentation like payslips or tax returns. Examples include credit cards, personal loans, and small-ticket education loans.

Difference in interest rates: Secured loans typically carry lower interest rates and higher borrowing limits compared to unsecured loans. Additionally, secured loans often offer longer repayment periods.

Secured v/s Unsecured Loan: Which is better?

Considerations for Unsecured Loans: Unsecured loans suit those needing smaller amounts urgently. They are faster to process since collateral evaluation isn't necessary. Approval relies heavily on income statements and credit scores, making documentation easier for Unsecured Loans.

They are suitable if:

There is no specific end use for the funds,
The loan amount you seek is small
You are ready to repay it within a shorter time frame.

This may mean a higher monthly EMI. Hence, plan your finances accordingly.

Considerations for Unsecured Loans:

On the other hand, it is better to opt for an Unsecured Loan if you need
A large loan amount
An extended repayment schedule over a longer tenure to ensure more manageable EMIs

Should you consider an Unsecured Loan?

If you need funds in a hurry and have a good credit score indicating impeccable repayment track record and high income which means you can afford the higher interest rate, then you are a suitable candidate for an Unsecured Loan. Ensure that you don’t delay your loan EMIs or default on the loan to maintain your unblemished credit history.

Also Read: Financial independence is just a secured loan away!

When does it make sense to take a secured loan?

Secured loans are advisable if you require higher loan amounts at lower rates, particularly when lacking or having a poor credit history. Also, if you need the loan for a specific need, such as buying or constructing a home or purchasing a car, then it is better to opt for Secured Loans as the terms and conditions are more favourable.

Types of Secured Loans and uses

Different secured loans offer varying percentages of the asset's value as the loan amount.

Loan against Property: Typically up to 60-65% of the property's value. Requires document scrutiny, credit checks, and property verification.
Loan against Securities: Amount varies based on instruments like mutual funds, shares, or bonds. Loan percentages fluctuate concerning the market value. Get loan up to 85% of your securities’ value.
Loan against Gold: Offers up to 75% of the gold's value, subject to market fluctuations.
Loan against Fixed Deposits: Allows borrowing up to 85% of the FD amount with a 2% interest rate over the FD rate.

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.