Secured Loan Vs. Unsecured Loan: What's the Difference?

As a consumer, you always want to be cash rich to fulfil your desires, but this is close to impossible when your income has limitations. Then comes the option of loans to fill in the gap and to fulfil the requirements. So, when you  think of borrowing, you would like to take a right and safe decision. You get confused between secured loan and an unsecured loan. So, let us find out what’s the difference?

Secured loan

Secured loans are business or personal loans that require some type of collateral as a condition of borrowing which acts as a security. The item purchased, such as a home or a car, can be used as collateral. The lender will hold the deed or title until the loan is paid in full. Other items can be used to back a loan too. This includes stocks, bonds, or personal property. The interest on this type of loan is comparatively lower.

Vehicle loans, Mortgage loans, loans against property, life insurance loans, car loans, etc, are a few forms of secured loan.

Unsecured loans

Unsecured loans like the name suggest is a loan that is not secured by collateral such as land, gold, etc. These loans are comparatively riskier to a lender and therefore associated with a high-interest rate. When a lender releases an unsecured loan, he does so after evaluating your financial status and assessing whether you are capable of repaying your loan or not.

Personal loans, student loans, credit card loans etc are the examples of unsecured loan.

What is the difference?

A secured loan requires you to provide the lender with an asset that will be used as collateral for the loan. Whereas an unsecured loan doesn’t require you to provide an asset as collateral in order to attain a loan.

Difference between the rate of interest. Secured loans usually have a lower rate of interest than an unsecured loan. This is because unsecured loans are considered to be risker.

Getting a secured loan is easier than unsecured loans as it is less risker for a banker.

Secured loans usually have longer repayment periods when compared to unsecured loans.

Conclusion

A secured loan is typically a better option than an unsecured loan as it has easier eligibility criteria, has a lower interest rate, and allows you to borrow a higher amount. The only downside is that the lender can repossess your property in case of default.

Even lenders prefer secured loans over unsecured loans as they are less risker to dispense. The lender is assured to get back the money loaned out, and even if he doesn’t the asset can be used to recover the loss of non-payment which cannot be done in case of an unsecured loan.