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Are you in need of some funds quickly but are confused about whether to choose secured or unsecured loans? A financial emergency can arrive anytime, and a loan is a go-to solution for many who do not have enough funds to deal with it.
In India, the number of individuals seeking personal loans and the ticket size of the loans sought have grown year-on-year. However, with so many available options, choosing the right type of loan can be overwhelming. This blog will discuss the key differences between secured and unsecured loans and help you decide which option is right for you based on your financial needs.
What is a Personal Loan?
A personal loan is a form of credit offered by financial institutions and banks that enables borrowers to use the money for personal expenses like home renovation, medical care, or emergencies. The borrowed money is to be paid over time with added interest in the form of equated monthly instalments or EMIs. It is mainly a multi-purpose loan that comes in two forms: secured and unsecured, each with different risks, interest rates, and eligibility.
Secured Loans
A secured loan is when a borrower puts some asset like a car, home, jewellery, or other property as collateral, which the lender can later claim. According to reports, about 70% of all loans taken in India are secured, considering they have low risk and sometimes comparatively lower interest.
Features of Secured Personal Loans
- A borrower needs to offer an asset as collateral.
- Due to lower risk, the interest rates are also less.
- The loan amount can be higher based on the collateral value.
- The repayment options can stretch over 5-10 years.
Pros and Cons
| Pros | Cons |
| Interest rates are lower | Collateral can be taken if the borrower fails to repay the loan |
| Higher principal sum borrowing limits than unsecured loans | May take time to approve due to the assessment of the collateral |
| Less eligibility requirements | There may be some additional costs for documentation |
Unsecured Loans
An unsecured loan is one in which a borrower is not required to put an asset as collateral. It is a standard option among personal loan lenders. According to reports, the growth of unsecured sunshine loans has slowed over the years.
Features of Unsecured Personal Loans
- No collateral is required as lenders rely on creditworthiness.
- Interest rates are higher than those of secured loans.
- Lenders mainly offer smaller amounts.
- The repayment period is shorter.
Pros and Cons
| Pros | Cons |
| There is no need to risk your assets as collateral | High rate of interests |
| Loans are quickly processed | Lower borrowing limits |
| Flexible use of funds | May have strict eligibility criteria |
Secured Vs Unsecured Personal Loans: Which is Better?
While secured and unsecured loans differ in a lot of ways, to help you decide which one is better, here’s a quick comparison of their key features:
| Feature | Secured Loans | Unsecured Loans |
| Collateral | Required (Such as jewellery, home or any other asset) | Not required |
| Risk | Lower | Higher |
| Interest Rate | Typically lower due to collateral | Higher due to increased risk |
| Borrowing Amount | Generally higher | Lower |
| Approval Time | Takes time as collateral needs to be assessed | Takes less time |
Which Loan is Right for You?
When choosing between secured and unsecured loans, it depends on your financial situation. However, let’s take a look at some key factors to consider:
- Income: One of the most important factors determining your loan eligibility is your monthly income.
- Collateral: If you own a valuable property or other asset and are confident that the loan will be repaid, you should consider a secured personal loan, which will benefit you with a lower interest rate.
- Loan Amount: If you require a higher loan amount, choose a secured loan; otherwise, unsecured loans are also an option for the lower amount.
- Assess Speed and Convenience: Unsecured loans are faster to process than secured loans due to the assessment of collaterals. However, there are instant loan apps like Bajaj Finserv that offer convenience and efficiency.
- Review Costs and Fees: Review all types of costs and fees associated with the loans. This includes appraisal fees for secured loans or processing and application fees for unsecured loans.
Bottom Line
Like every coin has two sides, both secured and unsecured loans have pros and cons and are valuable financial tools. It is advisable to consider the financial condition and needs before choosing one.
Before making any decision, compare everything using personal loan calculators and loan eligibility calculators. Then, you can apply for a secured loan using any loan app to make the process quick and easy or unsecured loans via lenders. With careful planning, you can opt for the right type of loan for your financial goals.
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