When you are planning to borrow money from any financial institution it is important and wise to know and understand each type of loan option available in the market. Loan options available in the market are of two types: Secured Loans and Unsecured loans. Both types of Loans have different characteristics and have their own set of pros and cons. For choosing the right type of loan it is important to understand the key difference between the two.

Understanding Secured Loan in detail

Secured loan as the name suggests is the type of loan that is backed by collateral security. This collateral security is something of value that you own. Example of collateral security be home, a car, jewellery, bonds, stocks or valuable personal property etc. these valuable items are considered as collateral security. If you opt for a secured loan, the lender i.e. the finance company who has offered loan money will hold the title of property or ownership of the collateral security provided by you. This ownership stays in the name of the finance company until you pay off the loan in full. In case, you fail to repay the loan money, the lender i.e. the finance company has the complete right to take the possession of the collateral security, to sell it and to take the proceeds of the sale of the collateral security to pay off the outstanding debt. Secured loan offers large amounts of money as this loan is backed by your personal property. The only risk associated with the secured loan is that if you fail to pay the loan money the lender can sell your beloved collateral security for paying off the outstanding debts.

What are advantages of secured loans over Unsecured Loans?

  • Low interest-rates as compared to an unsecured loan
  • High borrowing limits
  • Longer tenure for repayment of loan money

Here are some popular examples of secured loan

  • Home Loan
  • Car Loan
  • 2 – Wheeler Loan
  • Loan against Property

Understanding Unsecured Loan in detail

As the name suggests unsecured loan is the loan offered to you without any security. The unsecured loan is exactly opposite of secured loan. Under unsecured loan, the loan money is offered to you without any collateral security. As the unsecured loan is offered without any collateral security the rate of interest of this type of loan is higher as compared to a secured loan. The finance companies that offer unsecured loans assess your credibility and offer the loan based on qualities of the person like Character, Financial Capacity, Financial condition. These yardsticks are used by the finance company to understand your financial situation.

What are the advantages of Unsecured Loan?

If the finance company finds you suitable for an unsecured loan then following are the advantages of Unsecured Loan

  • You do not have to risk your personal asset for getting a loan
  • Best option if you are in need of quick or immediate cash
  • You will get a loan even if you do not have any collateral security
  • Quick loan processing time as the loan amount is small and there is no collateral security to evaluate

Here are some popular examples of secured loan

  • Credit Cards
  • Personal Loan
  • Education Loan

Thus above is the basic differentiation between secured and unsecured loan. let us now understand what things you must keep in mind while deciding between a secured loan and unsecured loan.

Deciding which is right for you secured loan or unsecured loan can be a daunting task but here are few pointers that you must ponder upon before taking a decision.

  • A secured loan is easier to avail, as compared to an unsecured loan, as it is backed by collateral security so the lender is at less risk
  • If you have a bad credit history then the lender will likely consider you for a secured loan rather than an unsecured loan
  • If you want to have access to high borrowing limits and lower interest rates then secured loan is the best choice
  • While paying off the loan it is very important to pay off your secured loan because if you fail to make payment then you may end up losing your collateral security

Both types of loans have their own set of strengths and weaknesses. Before making your borrowing decision make sure that you have a clear understanding about which option works best for your financial situation.