Secured vs unsecured loan: Know these important differences

Loan is a very common thing in our financial portfolio nowadays. Almost all of us have some sort of secured or unsecured loan. We generally avail home loan, car loan, personal loan, gold loan, pension loan, mortgage etc. because these are the most common loans. Categorically, loan can be split into two different types — secured and unsecured loan. Secured loans, such as home, gold, auto loans are backed by a collateral or security like house, property, gold or car whereas unsecured loans such as personal loans have no collateral or security. loan. This loan is generally sanctioned against the salary or the pension amount.

Money9 gives you a brief detail of these two types of loan and advantages and disadvantages of both the loans. Generally, interest rate of a secured loan is lower than the unsecured loan.

Secured loan

Due to the collateral provided for this loan, lenders are at minimal risk. In case of default or non-payment by the borrower, lenders can simply seize the asset to recover their dues.

Unsecured loan

Considering the greater risk attached with these types of loans, they come with higher interest rates than secured ones, because of which the loan amounts are also usually much smaller and tenure is small.

Loan amount

Generally, secured loan amount can go up to Rs 3 crore and above. People pledge home, property or even gold to take this type of loan. That is why loan amount is a bit high. Secured loan generally starts from as low as Rs 2/3 lakh and can go up to Rs 3 crore and more.

On the other hand, unsecured loans are small in amount. These loans are varies from Rs 1,000 and can go up to maximum Rs 10 lakh and above.

For a secured loan, maximum loan value generally is between 75 to 85% of the collateral value, be it home, gold or even property.

On the other hand, unsecured loan amount goes up to 30 times more than your monthly income. If you draw a salary of Rs 30,000, you can get a personal loan up to Rs 10 lakh or above.

Tenure

Loan repayment tenure of secured loan generally varies from 48 months to 360 months, depending on the amount and nature of the loan. Car loan or gold generally varies between three years and seven years.

On the other hand, home loan generally varies between 120 months and 360 months.

Repayment tenure of unsecured loan generally varies between 12 months and 84 months, depending up on the amount of the loan.

Processing

Secured loans have tougher eligibility norms than unsecured ones. This type of loan has high borrowing limits, longer repayment tenures and low-interest rates. Home loans are one of the most sought after secured loans generally availed from banks, where the new home purchased serves as the collateral.

On the other hand, unsecured loans have easier eligibility norms and the amount is much lower with shorter repayment tenure. Besides, interest rates of unsecured loans are much higher, almost double than secured ones.

Fail to repay

Loan repayment is the most crucial thing during the whole loan tenure. In secured loan, if you fail to repay the amount in time then your collateral, i.e. house, car or gold can be seized by the bank and they will sell it and recover the dues. The chance of a secured loan becoming an NPA is very less.

But in unsecured loan, if any individual fails to repay the loan in time, banks often try to recover the dues through recovery agents. But if you fail to repay the loan, your credit score would be hit and you may not any access to any types of credit instruments in future.