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 Personal Loans
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.
Unsecured Personal Loans
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.
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.