All you want to know about secured and unsecured loan!

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It is common to take a loan for personal expenses, starting a business or buying a house. A person has many options while taking a loan. But we are not able to choose the best deal. Because we do not understand what effect loan has on our financial health because many times mistakes are made in choosing the loan. In such a situation, it is important to understand what types of loans are there?  What is it used for? What are its advantages and disadvantages?

There are generally two types of loans, first is secured loan and second is unsecured loan. For secured loan you have to give any asset like property, vehicle, fixed deposit, shares, mutual fund etc. to the bank as security. It is used as a mortgage. Secured loans include home loans, car loan, gold loan, loan against property, shares or mutual funds.

The interest on secured loan is lower than that of unsecured loan because the mortgaged property reduces the risk for the bank, due to which they give loans at attractive rates for example, SBI home loan rates start from 9.15 per cent. Whereas for personal loan, which is an unsecured loan, the interest rate starts from 11.05 percent. You can borrow a larger amount in a secured loan. The loan amount depends on the value of the property kept as security. Secured loan is a good option for big financial needs like buying a house or starting a business.

The tenure of a secured loan is long for example up to 10, 20 years or 30 years This reduces the EMI burden on the person taking the loan. As a propoerty is mortgaged, banks take a lenient stance. So you can get a loan even if your credit score is low.

This loan is available against your asset. If you do not repay the secured loan, the bank can seize your asset and recover the loan by selling it.

At the same time, in an unsecured loan, you do not have to pledge any kind of property. These loans are approved on the basis of the borrower’s financial history and track record of repaying the loan. Personal Loan, Credit Card and Education Loans are unsecured loans…it has both advantages and disadvantages.

In unsecured loans, assets do not have to be pledged…therefore there is no fear of losing valuable assets in case of loan default. To reduce the risk associated with such loans, banks charge higher interest. In unsecured loans generally the loan amount is less.

Which one to choose between secured and unsecured loan depends on your financial condition and need. If you need a good amount of money for a long-term investment like buying a house or starting a business, then the secured loan can be a better option. On the other hand, if you need a small loan, then an unsecured loan is fine.

Before giving both types of loans, banks look at things like your credit score, income, job stability, repayment capacity i.e. ability to repay the loan. Credit score plays an important role in loan approval and interest rate. If your credit score is low then you can go with a secured loan.