Difference between secured loans and unsecured loans – Complete Guide

Before you know the difference between secured loans and unsecured loans you should know from where the origination of this type of loan came.

What is a loan?

In simple word basically, a person who borrow some money from NBFC or Bank for a particular period of time is called a loan.

What are the types of loans?

Loans are basically classified into two major categories. Secured loans and unsecured loans.

I hope now you got the idea about all these loans. Let’s see the difference between secured loans and unsecured loans.

What are secured loans?

Basically secured loans are protected with collateral. Collateral is nothing but any asset that helps the lender to have protection to the amount they give. Lenders can ask to keep collateral with themselves if they fail to repay the loan on time. That’s why secured loans are beneficial.

What are the examples of secured loans?

1. Home Loan
2. Vehicle Loan
3. Gold Loan
4. Business Loan against machineries
5. Loan against FD
6. Loan against insurance policy
7. Loan against MF
8. Loan against PF

What are the risks of default in secured loans?

Generally, the risk of default is low when you look at secured loans. Because here the value of the loan is less as compared to which asset loan you had taken. Simply you can say collateral reduces the risk of default.

For example, if you had purchased a home of Rs 1 Cr and made a loan of 80 lakhs. So in this case one has to pay the loan amount which is low compared to the actual value of the home.

What are the interest rates in secured loans?

It is low if you compare it with unsecured loans which we will talk about in a few minutes. When you look at the home loan interest it is around 8% which is good if you compare it with unsecured loans.

What happens if debtors are not able to pay the secured loans?

When people fail to pay the secured loans bank recovers dues by selling the debtor’s assets. Here the loss is of the debtors because banks get their amount by selling assets.

How much time does it take to get secured loans?

It is a very lengthy process because there are lots of papers works need to be done and checked before the person gets the secured loans. So it might take some time you can maybe weeks depending on the process and documents etc.

When should I take secured loans?

If you are looking to get a loan over one year then it is recommended that one should opt for secured loans. Because it has a low-interest rate. Note there may be other considerations factor to be made before taking any secured loans.

What is unsecured loans?

Unsecured loans are not protected by collateral which might be risky.

What are the examples of unsecured loans?

1. Personal Loan
2. Educational Loan
3. Credit Card Loan
4. Payday Loan
5. Unsecured Business Loan
6. Flexi Loan

What are the risks of default in unsecured loans?

The risk of default is high in the unsecured loans. Because unsecured loans are not protected with collateral which may lead to a high risk of default.

What are the interest rates on unsecured loans?

It is very high if you compare it with secured loans. When you look at the personal loan interest it is around 11% or maybe more which is high if you compare it with secured loans.

What happens if debtors are not able to pay the unsecured loans?

Banks write outstanding bills in their name. These can seriously hamper their credit card score which is generally known as cibil score. One should aim to have a cibil score over 750.

How much time does it take to get unsecured loans?

It is easy to take unsecured loans.

When should I take unsecured loans?

If you are looking to take a loan for less than one year period then you can take unsecured loans. But I highly suggest if needed very much then only you can go with it. Otherwise, you should not because their interest can be from 11% to 45%. Credit card loan interest are horrible.

Conclusion

One should have a clear and proper plan before taking any loan. Because one should know that debt can seriously put them in danger and debt can be like a nightmare for them. Don’t take me wrong but understand it.

FAQ’s

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