While we all received unsolicited messages regarding business loans on attractive interest rates or messages promising an ‘instant’ loan without any collateral, not all of us understand the fundamental differences between loans from banks and personal loans from online lenders. Broadly speaking, most loans fall into one of the two categories of secured loans and unsecured loans. A smart and aware borrower should understand the differences between these two options in order to make a suitable choice. Let’s take a look at secured and unsecured loans and how they differ from each other.
Secured Loans vs. Unsecured Loans
What are secured loans?
Secured loans are the loans wherein a borrower needs to submit collateral, that they own (as a security to the lender), in order to get a loan. They get their name from the fact that the loan amount is ‘secured’ against collateral. Depending on the type of loan, collateral can be any kind of an asset or a value that a borrower owns such as a car, a house, jewelry, or a piece of land. This collateral is kept by the lender during the entire repayment tenure. If the borrower fails to repay the loan amount along with interest, the collateral is used by the lender to recover the loan amount.
Secured loans usually have high borrowing limits. In most cases, the borrowed amount is equal to, or slightly lesser than, the value of the collateral furnished by the borrower. These loans can be borrowed for different purposes such as buying a vehicle, purchasing a home, going abroad for education or expansion of business, etc. You can avail a secured loan from banks or related financial institutions.
What are unsecured loans?
As the name suggests, unsecured loans are that the loans that do not require any collateral or security from the borrower. These loans are issued and supported by the borrower’s ability to repay the loan and their creditworthiness is usually established by their current earnings. At PaySense, for instance, salaried individuals who earn a minimum of Rs. 12,000 per month and self-employed individuals who earn a minimum of Rs. 15,000 per month can avail unsecured personal loans.
The terms on unsecured loans are slightly more expansive and depend on factors such as the borrower’s income, occupation status, and their credit history with the lender. Borrowers can take unsecured personal loans for a variety of purposes like funding travel plans, undertaking home renovation activities, during medical emergencies, purchasing consumer durable goods or even simply consolidating their loans from different sources. There are several online lenders, like PaySense, that offer unsecured personal loans in India.
How are unsecured and secured loans different?
Both of these loans are suited to meet the different needs of the borrower. Here are the main differences between the two:
- The requirement of collateral: The primary difference between the two is the requirement of collateral. Secured loans require collateral (such as jewelry, vehicles or real estate) while unsecured loans are collateral-free.
- The interest rates: Secured loans have a lower interest rate due to the lesser risks involved. Unsecured loans might have a comparatively higher interest rate due to the lack of any security as collateral.
- Maximum loan amount: One can borrow any amount of money through secured loans depending upon the collateral provided. Unsecured loans generally have a cap on the amount they offer to their customers and usually offer small loan amounts. PaySense, for examples, offers loans from Rs. 5,000 to Rs. 2, 00, 000.
- The processing time: Secured loans require collaterals which cause more documentation and require longer loan approval and processing time, which may take weeks. Unsecured loans, on the other hand, have lesser documentation formalities and are processed faster. For example, PaySense grants approvals to loans within two working hours and disburses them within 3-4 working days after the approval.
Which loan should you choose?
If you are considering applying for a loan, ensure that you make the right choice. Here are a few tips to help you:
- Your ability to provide collateral: If you are unable to provide collateral or securities, you will have to go for an unsecured personal loan.
- The amount of loan that you require: For small loans amounts, approaching an online lender like PaySense will come with several benefits like instant approvals, fixed EMIs and repayment flexibility. In case you need a higher loan amount, consider secured loans from banks.
- How urgently you need the loan amount: Unsecured loans are collateral free and hence quicker. You should consider them for urgent requirements.
Bottom-line: Be sure of your choice when borrowing
It is important to choose a loan that is suited to your needs. Both secured and unsecured loans have their own pros and cons. Understanding these two types is necessary to help you choose the right option for your requirements. Having a clear understating of which of the two option works best for your current situation and finances can help you make the right call. Depending on your ability to provide collateral and the urgency with which you need the funds, you can opt for secured or unsecured loans from banks and online lenders, respectively.
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