Secured Loans vs. Unsecured Loans: When to Consider Which?

When you are in need of funds, loans can be of the biggest help. Loans are basically of two types — secured loans and unsecured loans. While debating what to choose between secured and unsecured loans, first, it is important to understand the difference between these two.

Some Common Differences Between Secured and Unsecured Loans

a) A secured loan is a type of loan in which the borrower pledges some asset (e.g., a car, property, gold, stocks, bonds, and so on) as security to the lender to get funds. Some examples are Loan Against Property, Home Loan, auto loan, recreational vehicle loan, and so on. For obtaining unsecured loans, no collateral is required.

b) Secured loans typically have longer tenure than unsecured loans. For example, in the case of Home Loan and Loan Against Property, you can get tenures of up to 30 and 20 years respectively. However, in the case of Personal Loans, the maximum tenure is of up to 5 years (in most cases).

c) The interest rates on secured loans are comparatively much lower than unsecured loans. The main reason for this is, secured loans are backed by collateral, so, the risk factor for lenders are minimal.

d) Turnaround time for unsecured loans is generally quick in comparison to secured loans. That is because secured loans involve the verification and evaluation of the property.

Which One is Best?

When you want to borrow the money, there are a few important factors that should be taken into consideration while deciding between secured and unsecured loans.

When Should You Consider Taking Secured Loans?

a) Urgency

If you’re in urgent need of money, an unsecured loan is a way to go as it is relatively easier to get. You just need to have a good credit score (700 or above), clean repayment history and a regular source of income.

b) Money Management

A secured loan is generally available at comparatively better interest rates along with the option of negotiating different types of repayment terms to the borrower making them a smarter money management decision when compared to an unsecured loan. Furthermore, secured loans offer higher borrowing limits to the eligible applicants, enabling them to reap long-term benefits.

c) Big Purchases

Since secured loans require you to deposit an asset as collateral to the lender, it makes more sense to consider such loans for big purchases such as that of a house.

d) Longer Repayment Period

If you’re looking for the bigger window to repay the loans, secured loans are the best options to look at as they usually have longer repayment periods as compared to unsecured loans.

When Should You Consider Taking Unsecured Loans?

a) To Finance Small Purchases

Taking an unsecured loan is a great way to finance relatively cheaper purchases such as gadget, furniture, electronic items, and so on. Since you do not have to pledge any of your assets as collateral, they help in getting you a better deal when compared to seller financing options.

b) Consolidating Credit Card Debt

If you have one or more Credit Cards which have reached their limit, taking an unsecured loan such as a Personal Loan to consolidate all the charges into single monthly payment constitutes a smart decision.

c) Refinancing Student Loans

Since interest rates for student loans are generally higher, you should try and Get Unsecured Personal Loans to pay off your education debt as the loans are charged at a lesser rate when compared to student loans.

Loans are a smart and flexible way to fund important expenses. However, while deciding on whether to choose a secured loan or an unsecured one, you should take all the pros and cons associated with both types into consideration. Going for unsecured loans such as a Personal Loan makes sense if you do not want to risk pledging an asset as collateral or want to save money on the interest. On the other hand, secured loan options are suitable for financing huge or important purchases such as those of a home or a vehicle.

Also Read: Are You Eligible for an ICICI Bank Personal Loan?

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