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A Complete Guide to Secured and Unsecured Personal Loans

A Complete Guide to Secured and Unsecured Personal Loans

With the economic effects of the pandemic finally coming true, both individuals and organizations are trying to get back on their feet and mend their finances. For individuals who had faced salary cuts and had delayed payments, a personal loan is often what comes to the rescue. There are two types of personal loans- secured and unsecured. What is a secured loan and unsecured loan, what’s the difference, and which one should you choose? Let’s have a brief look.

Secured personal loan

When you avail a secured loan, you basically take it from an insurance agency along with an asset that can back up the loan. The asset is mortgaged for the amount you borrow as a secured personal loan. Once you repay your entire loan amount, your asset can be free from mortgage and you needn’t worry about it anymore. However, till the time your loan is not repaid, your asset is virtually held by the bank. If you fail to make the payment, your asset can be taken over by the lender. 

There are various advantages of a secured personal loan. Since assets are kept as security, these loans are easier to procure and carry lower rates of premium. They also charge lower personal loan interest rates. The finer details a different for each lender, but loan amount limits and repayment tenures are also higher when it comes to secured loans. 

Also, read – What is the Difference Between Secured vs Unsecured Loans?

Unsecured personal loan

Unsecured personal loans are not protected by any collateral. Interest rates for these loans are generally higher as opposed to secured personal loans. These are usually taken by individuals who are able to repay smoothly without having to compromise on their assets. Unsecured loans are usually opted for in case of student loans, credit card debt payments, etc. Interest rates are generally higher for unsecured personal loans. The principal amount could be lower than that of a secured loan, and so would be the repayment tenure. 

However, there are numerous positives of an unsecured personal loan. These are not as risky as secured loans, so you don’t carry the stress of probably losing your belongings. An unsecured loan process is much simpler, with no collateral assets to evaluate and process. The documentation is much easier. One of the key advantages is that it is more accessible. You need not own assets to be able to borrow. You, however, do need a good credit history and credit score. This is something you can easily check online within minutes before applying for the loan. 

Also, read – Pros and Cons of Unsecured Personal Loan

Secured vs Unsecured Personal Loans: How to Choose

There are certain key aspects to consider before choosing any personal loan. The primary factor is, of course, the interest rate. Interest rates vary from lender to lender. The other key aspect is the process of acquiring the loan. Many times, the need for a personal loan is urgent. At such a time, you wouldn’t want to waste precious time on a long documentation process. You should always do your homework and conduct a quick check by comparing loans on an aggregator site. You can also check the personal loan EMIs and interest rates offered by various lenders on their official websites. 

Based on all of these considerations, we strongly suggest an unsecured personal loan over a secured one, because of the following factors. 

  • You needn’t bother with worrying about both repayment and losing an asset when you take an unsecured loan. 
  • The process of an unsecured loan is much shorter and easier, making emergency borrowing practical. 
  • Unsecured loans will motivate you to maintain a good credit score. If you make your repayments on time, it will ultimately help you with all your borrowings in the future as well. 
  • You can close an unsecured loan much faster as it is a smaller amount with lower interest and shorter repayment tenure. 

Also, read – Low salary personal loan: Options & how to apply

Key Differences Between Secured and Unsecured Loans

Now that we are clear on what is secured loan and unsecured loan, let’s delve into their differences. Before applying for a loan, it’s important to know what the difference between secured and unsecured loan.

In order to know what sets each type apart look at the secured vs unsecured loan table below for easy loan comparison:

CriterionSecured LoansUnsecured Loans
Collateral/SecurityRequires an asset as a collateral e.g., property, vehicle, stocks, or other valuables.No collateral required; loan is given based on borrower’s creditworthiness and income.
Interest RateLower rate. Because there’s collateral, the lender’s risk is less, so they can charge lower interest.Higher rate. Since there’s no asset backing, the risk to lender is bigger, so interest is higher.
Borrowing Limit/Loan AmountThere’s a higher borrowing limit. The amount you can borrow is often linked to the value of the collateral.Lower limit compared to secured loans. Since there’s no collateral, lenders restrict how much they can lend.
Repayment Tenure (Loan Term)Longer tenure. Secured loans often let you pay back over a longer period.Shorter repayment term generally.
Risk/Consequences of DefaultHigher risk for borrower’s assets: if you default, lender can seize and sell the collateral.No direct seizure of physical assets, but defaulting hurts your credit score, and the lender may take legal action.

Also, read – Personal loan for CIBIL score of 550: How to get approved

Who Should Consider a Secured Personal Loan?

Now let’s answer the question “When to take a secured loan?” Secured loan is suitable for individuals who have valuable assets (such as property, vehicles, gold, or financial investments) that they can pledge as collateral to secure a lower-cost, higher-value loan.

An ideal candidate for secured loan is someone who:

  • Has valuable assets to pledge as collateral.
  • Needs a larger loan amount.
  • Prefers lower interest rates.
  • Is comfortable with longer repayment tenure.

Who Should Opt for an Unsecured Personal Loan?

If you’re wondering when to take an unsecured loan, it usually works well for people without collateral or who need quick access to funds. Unsecured loan is suitable for borrowers with stable income and good credit.

Knowing when to take an unsecured loan helps ensure it aligns with your financial condition.

An ideal candidate for unsecured loan is someone who:

  • Doesn’t want to pledge their valuable assets.
  • Has a good credit score and stable income.
  • Needs smaller or moderate loan amounts.
  • Wants fast processing without lengthy documentation.

Also, read – What is Loan Modification

Factors Influencing Interest Rates for Secured and Unsecured Loans

The interest rates secured vs unsecured loans have, can vary significantly due to several factors affecting loan interest. depends primarily on the risk to the lender, the borrower’s credit profile, and the nature of the loan. These factors will help borrowers in understanding how interest rates are determined and help them make informed choices before deciding on secured loan vs unsecured loan:

  • Collateral: The key factor determining secured vs unsecured loan interest rates is security/collateral. Secured loans usually have lower interest rates as the lender can claim the asset if the borrower defaults.
  • Creditworthiness: Borrowers with strong credit histories are offered lower rates, especially for unsecured loans.
  • Loan Amount and Tenure: Larger loans or longer repayment periods also influence how interest rates are determined.
  • Risk and Costs: Lenders factor in potential default risk and administrative expenses when setting secured vs unsecured loan interest rates.

Impact on Credit Score: Secured vs Unsecured Loans

Both secured loan and unsecured loan can have impact on your credit score, but due to different reasons.

The secured loan credit score impact depends on timely repayments and responsible management of the collateral. Regular payments can boost your credit profile, while defaults may lead to the lenders seizing your asset and a negative mark on your credit report. Understanding this effect helps borrowers plan repayments carefully.

Whereas unsecured loan credit score effect is tied entirely to your repayment behaviour. Missed payments directly lower your score, as there is no collateral to offset the lender’s risk. Monitoring loans and credit scores ensures borrowing strengthens, rather than weakens, your financial standing.

Also, read – What is Moratorium Period

Conclusion

The ultimate choice for your personal loan needs will depend on your specific requirements and financial situation. However, no matter how urgent it is, do remember to conduct a thorough check and make an informed decision. Use loan calculators and get an accurate idea of what you’re signing up for. 

If you’ve made up your mind about an unsecured loan, Tata Capital Unsecured Personal Loan would be a good choice with its flexible repayment tenure, quick documentation and easy processing, and attractive interest rates, among other features.

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FAQs

What is the main difference between a secured and unsecured loan?

A secured loan requires collateral, such as property or savings, while an unsecured loan does not. Secured loans reduce lender risk, often allowing higher borrowing amounts, whereas unsecured loans rely entirely on the borrower’s creditworthiness. Hence, requirement of collateral forms the key difference between secured loan vs unsecured loan.

Which type of loan has lower interest rates?

When the option is between secured loan and unsecured loan, secured loans generally have lower interest rates. It is because the collateral reduces the lender’s risk. Unsecured loans carry higher rates as there is no asset to recover in case of default.

Do I need collateral for an unsecured personal loan?

No, unsecured personal loans do not require collateral. Approval is based on income, credit score, and repayment capacity, rather than pledged assets.

How does a secured loan impact my assets?

If you default on a secured loan, the lender can seize the pledged asset. Proper repayment avoids any negative effect on your property or savings.

Is it easier to get a secured or an unsecured loan?

Secured loans can be easier to obtain for borrowers with collateral, even with lower credit scores. On the other hand, unsecured loans depend heavily on strong credit and stable income.

What credit score is needed for an unsecured personal loan?

Lenders usually require a good credit score, typically above 700, for unsecured personal loans. Higher scores improve approval chances and interest rate offers.

Can I convert my unsecured loan to a secured loan?

In most cases, loans cannot be converted directly. You may repay the unsecured loan and take a new secured loan using collateral, subject to lender approval.

What are the risks of defaulting on a secured loan?

Defaulting can lead to the lender seizing the collateral, harming your financial stability and potentially affecting your credit score.

What are the risks of defaulting on an unsecured loan?

Unsecured loan defaults do not risk assets, but they severely damage your credit score, increase penalties, and may lead to legal action.

Which loan is better for a small amount?

Between secured and unsecured loans, for small amounts, unsecured loans are more suitable as they don’t require pledging of assets as collateral and also get approved faster than secured loans.

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