An integral part of our financial lives, loans help accomplish our goals. Be it buying the dream home, purchasing that much-wanted car, or setting up office infrastructure, loans provide you the financial muscle to script success in your endeavor.
Thanks to digitalization, availing loans has become relatively easy these days. You need to fill up the application form, upload the relevant documents, and, in many cases, the money is instantly credited into your account.
Among the several things you need to know before taking a loan is its nature. That is, whether the loan is a secured loan or an unsecured loan. There are stark differences between the two and understanding them is essential to make the right choice.
So, if you are confused about whether to opt for a secured loan or go for an unsecured one, this article is your guiding light.
What is a Secured Loan?
A secured loan is backed by collateral. In other words, you need to pledge something as security to the lender to avail a secured loan. For example, when you opt for a Home loan, the home is the collateral. If you fail to repay the loan, the lender may have the right to seize your house and sell it to recover the dues.
Similarly, when you opt for Loan Against Property, the property is the collateral. If you don’t pay the loan on time, the lender can auction the property to recover the amount. Some other examples of secured loans include gold loans, car loans, loans against fixed deposits, etc.
What is an Unsecured Loan?
In an unsecured loan, contrary to secured loan, the borrowers do not need to pledge any collateral to the lender to avail the required funds. In other words, there’s no security involved while availing an unsecured loan. The various types of unsecured loans include personal loans and business loans.
Differences Between Secured Loan and Unsecured Loan
While collateral requirement is the fundamental difference between secured and unsecured loan, they differ on several other parameters. These include:
The loan amount in a secured loan is generally higher than an unsecured loan. As the former is backed by collateral, there is a sense of assurance of repayment. Therefore, in an unsecured loan, the limit tops off typically at INR 50 lac, whereas, in secured loan the limit depends upon the lender, the collateral pledged and the repayment capacity of the borrower.
Rate of Interest
Secured loan interest rate is comparatively lower than unsecured loans. For instance, you will find home loan interest rates lower than personal loans or other types of unsecured loans. This happens because secured loans are backed by collateral, unlike unsecured loans.
A secured loan’s repayment period is much higher than an unsecured loan. Usually, the repayment period for secured loan ranges from 10 years to 30 years. And for unsecured loans, this period can be between 5 – 7 years.
The table given below captures the basic differences between secured and unsecured loans:
|Parameters||Secured Loan||Unsecured Loan|
|Rate of Interest||Low||High|
Should You Avail a Secured Loan or an Unsecured Loan?
Secured and unsecured loans have their own utility. If you need funds in a considerable amount to buy an asset such as a home or car, you can opt for secured loans. On the other hand, unsecured loans are a better option for short-term or emergency needs such as addressing personal or medical exigencies. Irrespective of the loan you opt for, make sure you research well about the loan product and lender, and lastly, you repay on time.
Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions. Click here to know more about the offering.
The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any investment decision.