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Top 6 differences between Secured and Unsecured Loans
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
- Credit Cards
- Personal Loan
- Student Loan
- Line of Credit for personal use
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.
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