Secured Personal Loans vs Unsecured Personal Loans - Personal Loan Blog by Tata Capital

Secured vs. Unsecured Personal Loans

Mar 01, 2017

Most individuals prefer opting for consumer loans to meet their emergency financial needs. It is important to understand the various aspects of these loans like loan eligibility, tenure, and interest rates.

Another aspect that potential loan seekers need to take into consideration is the type of loan. The two most common types of consumer loans are secured and unsecured loans.

Secured loans

A personal loan which requires one to provide collateral against the loan as security is known as secured loan. Collateral may be any asset which has a value equal to or more than the amount of the loan. Real estate like land and houses are commonly used as collaterals. If the borrower defaults on his regular payments, the lender takes complete possession of the collateral.

Unsecured loans

Unsecured loans are the opposite of secured loans. These are issued on the basis of the creditworthiness of the borrower. The loan applicant need not keep any security against the loan. In case the applicant fails to make timely repayments, the lender cannot take possession of your property. Generally, personal loans are unsecured loans. Lenders take a higher risk with such loans. This is why unsecured loans usually require a guarantor who is willing to pay if the borrower is unable to repay the loan amount.

Difference between secured and unsecured loans

There are three differences between the two types of personal finance

  1. Rate of interest
    Besides the collateral aspect, another major difference is the interest rate. The rate of interest is lower for secured loans as lenders hold collateral and face less risk in case of non-payment. Banks and lending institutions typically levy a higher interest rate for unsecured debt as the risk is higher. The rate of interest is for unsecured loans, also known as signature loans, is also high because many legal fees would be required in case the borrower fails to repay.
  2. Borrowing limit
    A secured loan helps you to raise more amount of money. This is due to the fact that such loans offer higher borrowing limits. The higher value of a home or collateral allows for a greater sum to be borrowed. On the other hand, the borrowing limit for unsecured funds is less as there is no security against the loan.
  3. Credit history
    It is imperative to have a very good credit score to qualify for an unsecured loan. Lenders conduct extensive checks on your credit history to identify your ability to repay. Such reports contain information about your past loans and repayments. Your loan application will get approved only if the lender is confident about your financial stability. Secured loans, on the other hand, do not necessarily require applicants to be creditworthy as collateral covers the associated risks.

Deciding which type of loan is right for you may be a tricky decision. There are pros and cons of each alternative. It is important to choose the one in which is beneficial for you. Whether you are availing of secured or unsecured loans, always borrow only how much you can afford to repay.