Secured and Unsecured Loans - Meaning , Advantages and Difference | AU Small Finance Bank
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Secured and Unsecured loans

    At some point in time in your life, you are likely to apply for a personal loan from a lender. As a consumer, you have two options to choose - secured loans and unsecured loans. Both of these loans have their own sets of features and benefits and are suitable for specific purposes. In this article, we will explore what separates secured and unsecured personal loans and when should you go for them.

    Secured Loan Meaning

    Secured personal loans, as the name suggests, are backed by a security/asset. The lender will loan you the money only after you have put up collateral - it can be assets like house, cars, jewellery, properties, land, etc.

    When you borrow a secured personal loan, you are essentially giving permission to the lender to possess the collateral if you are unable to repay the loan as per the agreed terms. The lender then has the right to sell the asset to recover the costs of the loan. In case the collateral is unable to cover the quantum of the loan completely, you will be liable to pay the remaining difference.

    For this reason, secured personal loan applications are always accompanied by title deeds/necessary documents that prove the ownership of the asset.

    Advantages of Secured Loans

    • Low Rates of Interest: 

      Since you are borrowing money through a lien, that is, you are providing collateral for the loan, the lender is not exposed to a lot of risks. For this reason, secured loans come with low interest rates.
    • Higher Odds of Approval: 

      Once again, since the loan is less of a risk for the lender (thanks to the collateral), he/she is more likely to approve your application.
    • Flexibility: 

      This option is pretty much true for secured loans and unsecured loans. There are no restrictions on how you are required to use the money, unlike car loans or student loans. Whatever money you borrow, you are free to spend it in any way you see fit.
    • Higher Processing Times: 

      Secured personal loans take time to process since a lot of documentation is involved here. Banks/lenders need to do their due diligence and verify the deeds and documents before sanctioning the amount.
    • Loan Amount is Proportional to Your Asset: 

      The quantum of the loan amount here depends greatly on the value of the collateral you have. Higher the value of your assets, the more you can borrow from the bank.
    • Your Assets are at Risk:

      In the unfortunate situation that you are unable to repay your secured loan, the lender has the right to sell your assets. Therefore, you should have a proper plan of repayment to ensure that you don’t lose your assets.

    Unsecured Loan Meaning

    Unsecured personal loans require absolutely no collateral. In other words, these loans are not tied to any assets/securities and therefore, the lender cannot take your belongings as a way to repay the loan. Some of the most basic examples are student loans and general personal loans.

    In this case, the loan is sanctioned depending on your credit history and credit score. If you are good at dealing with credits, it will serve as a good sign to the lender and consequently, they will be inclined to offer you the loan. On the flipside, if you have a low credit score, then your personal loan application may very well be rejected.

    Advantages of Unsecured Loans

    • High Interest Rates:

       Since there is no collateral here, the lender is at risk here. To compensate for the risk, he/she will levy a high interest rate.
    • Easy Application: 

      Thanks to minimal documentation, it is very easy to apply for an unsecured loan. These days if you are a bank’s existing customer, you can do it online with a few clicks! Pre-approval also depends on your credit score.

    Difference between secured and unsecured loan

    Irrespective of the type of loan you apply for, it is recommended that you do your homework and research interest rates thoroughly. With that, you should read up on additional fees, repayment charges, and other associated terms that come with your personal loan. As a rule of thumb, remember: secured personal loans make sense when you need to borrow a large sum, whereas unsecured loans are feasible for small purchases. Lastly, always borrow what you can afford to pay back.

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