Exploring the Difference Between Secured Loans vs. Unsecured Loans
Loans play an important role in our financial journey, empowering us to achieve our goals, whether it's buying a dream home, getting a desired vehicle, or setting up an office. They provide the financial support needed for success. Online processes have made applying for loans more convenient. You can now complete a loan application, upload the required documents, and receive funds into your account without visiting a financial institution.
Before you apply for a loan, it's crucial to understand the differences between secured and unsecured loans. These two types of loans vary significantly, and grasping these differences is essential for making an informed choice.
What is a Secured Loan?
A secured loan requires collateral, meaning you must pledge something as security to the lender. For instance, in a Home Loan, the home serves as collateral. If you default on the loan, the lender may seize and sell your house to recover the outstanding amount.
The same principle applies to Loan Against Property, where the property is used as collateral. Failure to repay could lead to the lender auctioning the property. Other examples of secured loans include gold loans, car loans, and loans against fixed deposits.
Also Read: What is Loan Against Property? Features, Eligibility, Documents, and more
What is an Unsecured Loan?
In contrast to a secured loan, an unsecured loan does not require borrowers to pledge any collateral to the lender to access the funds. This means that there is no asset tied to the loan as security. Unsecured loans are granted solely based on the borrower's creditworthiness and ability to repay.
Business Loans or MSME loans, which are used to finance business operations, expansion, or equipment purchases, are an example of unsecured loans.
Since unsecured loans do not require collateral, lenders typically assess the borrower's credit score, income stability, and financial history to determine loan eligibility and terms. Interest rates on unsecured loans are often higher than secured loans to compensate for the increased risk to the lender. Additionally, unsecured loans may have shorter repayment terms compared to secured loans.
Also Read: How to Get a Business Loan Without Collateral in India?
It is advised that borrowers check the payable EMI using an EMI calculator and evaluate their repayments before taking a loan.
Differences Between Secured Loan and Unsecured Loan
While the collateral requirement is one of the key differentiators between secured and unsecured loans, there are other parameters such as:
- Loan Amount: Secured loans generally offer higher loan amounts than unsecured loans. Since secured loans are backed by collateral, lenders are more willing to lend larger sums. In contrast, unsecured loans typically have a limit of around INR 50 lakh. However, the exact limit for a secured loan depends on factors such as the lender, the collateral provided, and the borrower's repayment capacity.
- Interest Rate: Secured loans generally have lower interest rates compared to unsecured loans. For example, home loan interest rates are typically lower than personal loan rates. This is because secured loans are less risky for lenders, as they have collateral to fall back on if the borrower defaults.
Also Read: How Does Your Credit Score Impact Interest Rates on Loans?
- Repayment Period: The repayment period for secured loans is usually longer than for unsecured loans. Secured loans can have repayment periods ranging from 10 to 30 years, depending on the terms of the loan and the lender. On the other hand, unsecured loans typically have shorter repayment periods, often between 5 to 7 years.
Secured loans offer higher loan amounts, lower interest rates, and longer repayment periods compared to unsecured loans. The choice between the two depends on the borrower's needs, financial situation, and willingness to provide collateral.
Also Read: Design your EMI: The Flexibility You Need for Loan Repayments
Comparison Between Secured and Unsecured Loans:
Aspect |
Secured Loans |
Unsecured Loans |
|
Loan Amount |
High |
Low |
|
Rate of Interest |
Low |
High |
|
Disbursal TAT |
High |
Low |
|
Repayment Period |
Long |
Short |
|
Loan Amount |
High |
Low |
|
Should You Avail a Secured Loan or an Unsecured Loan?
The decision to apply for a secured or unsecured loan depends on your specific financial needs. Secured loans are ideal if you require a substantial amount of funds to purchase an asset like a home or car. The collateral requirement in secured loans often results in lower interest rates and longer repayment periods, making them suitable for long-term investments.
On the other hand, unsecured loans are more suitable for short-term or emergency needs, such as covering personal or business expenses. While unsecured loans typically offer higher interest rates, do not require collateral and are processed more quickly, making them a viable option for urgent financial requirements.
Regardless of the type of loan you choose, it is crucial to conduct thorough research on the loan product and lender. Additionally, ensure that you have a clear repayment plan in place to avoid any financial difficulties in the future.
Also Read: Guidebook: Different Types of Business Loans in India
Seeking funds for business growth? Apply for a Business Loan or a Loan Against Property with Godrej Capital and enjoy a collateral-free loan, with quick approval and disbursal, rewards on timely repayment, flexible repayment plans, and round-the-clock customer support.
With Godrej Capital loans for businesses, MSMEs can borrow and utilise the benefits of Flexi Funds, an overdraft-like facility, and enjoy ready access to funds from a pre-determined limit. With Flexi Funds, you can choose to withdraw and repay funds based on your requirements, with interest being charged only on the utilised amount.
Disclaimer: The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com
