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Differences Between Secured and Unsecured Personal Loan
Posted on Tuesday, May 2nd, 2023 | By Indusind Bank
When you’re in need of funds—be it for a medical emergency, a wedding, or home renovations—personal loans offer a convenient way to access quick credit. But before you apply, it’s essential to understand the type of personal loan that’s right for you. Broadly, personal loans fall into two categories: secured and unsecured.
While both serve the purpose of providing financial assistance, they differ in how they work, what’s required from the borrower, and the level of risk involved. Let’s break down the difference between secured and unsecured personal loans so you can make an informed decision.
Secured Vs Unsecured Personal Loan: Understand the Differences
Understanding the core difference comes down to one thing—collateral. A secured loan is backed by an asset; an unsecured loan isn’t.
Secured Personal Loan
Secured personal loans are loans that require collateral or a guarantor to get funds. This collateral can take many forms, such as a home, car, or other valuable assets. The lender has the right to take possession of the collateral if the borrower fails to make payments on the loan. This is why secured loans typically have lower interest rates and higher borrowing limits than unsecured loans.
One advantage of a secured personal loan is that you can usually borrow more money than with an unsecured loan. This is because the collateral provides the lender with security in case the borrower defaults on the loan. Another advantage is that secured loans typically have lower interest rates than unsecured loans. This is because the lender is taking on less risk by having collateral as a backup.
However, there are some downsides to secured loans as well. One of the biggest concerns associated with a secured personal loan is that you could lose your collateral if you default on the loan repayment. This means that you need to be very careful when deciding to take a secured personal loan. Additionally, the application process for a secured loan can be more complicated than for an unsecured personal loan, as the lender will want to inspect and evaluate the collateral before approving the loan.
Unsecured Personal Loan
An unsecured personal loan is a loan that does not require any guarantor or collateral. This means that the lender cannot take possession of any assets if the borrower defaults on the loan. Because of this, unsecured loans typically have higher interest rates and lower borrowing limits than secured loans.
One advantage of an unsecured loan is that you do not have to put up any collateral to get the loan. This means that if you default on the loan, you will not lose any assets. Additionally, the application process for an unsecured loan is often simpler and faster than for a secured loan, as there is no need to evaluate collateral.
There are some downsides to unsecured loans as well. One major disadvantage is that they typically have higher interest rates than secured loans. However, some leading banks like IndusInd Bank offer best-in-class interest rates on instant personal loan at minimal processing fee. Also, IndusInd Bank Personal Loan application is 100% paperless making it more convenient for the customers to get funds quickly.
Which Loan is Right for You?
Choosing between a secured and unsecured loan depends on your personal financial situation:
- Go for a secured loan if you need a large loan amount, want lower interest rates, and are comfortable pledging an asset.
- Opt for an unsecured loan if you want quick funds with minimal paperwork and don’t want to risk losing any belongings.
Your credit score, urgency, repayment ability, and comfort with collateral should guide your decision.
Summing Up
Whether you go for a secured or unsecured personal loan, the key is to assess your needs and repayment capacity before applying. Secured loans are great for low-cost borrowing when you have assets to pledge. On the other hand, unsecured loans offer speed and convenience, especially if your credit profile is strong.
Understand the terms, compare interest rates, and pick the loan type that works best for your financial journey.
