A Personal Loan can be a worthwhile source of financing to meet one's short-term and long-term goals. As a result of the overwhelming number of personal loan options available, it is often difficult for borrowers to decide which option to select. Personal loans are of two types - secured loans and unsecured loans.
That being said, it's important to understand the differences between secured and unsecured personal loans, so you can choose the option that's right for you. By understanding the benefits and risks of each type of loan, you can make an informed decision and feel confident in your financial future.
This blog aims to help readers make an informed decision by providing a detailed understanding of the key differences between secured personal loans and unsecured personal loans.
Key Highlights
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What is a Secured Personal Loan?
Secured loans are a type of personal loan that is backed by collateral. A collateral is an asset of value owned by the borrower that is pledged to the lending institution as a guarantee of repayment. These assets can include a house, car, jewellery or stocks. If the borrower fails to make payments on the loan, the lending institution has the right to seize the collateral to recoup their losses.
Secured personal loans are often used for larger purchases, such as buying a home or a car, as they typically offer lower interest rates and longer repayment terms than unsecured loans.
It's important to carefully consider the terms and conditions of a secured loan before accepting it, as defaulting on the loan can result in losing your collateral and damaging your credit score.
What is an Unsecured Personal Loan?
An unsecured personal loan is a type of loan that does not require collateral to secure the loan. This means that the borrower does not have to pledge any assets as a repayment guarantee. Instead, the lending institution approves the loan based on the applicant's creditworthiness and financial history.
Because unsecured personal loans are not secured by collateral, they are considered riskier for lending institutions and therefore may come with higher interest rates and shorter repayment terms.
Unsecured personal loans are often used for smaller purchases, such as paying for a vacation or home improvements. However, they can also be used for larger purchases, such as financing weddings or consolidating high-interest credit card debts. Shriram Finance offers unsecured personal loans of up to ₹15 lakhs at competitive interest rates starting from 12%* p.a.
Secured Personal Loan vs Unsecured Personal Loan
| Features | Secured Personal Loan | Unsecured Personal Loan |
| Collateral | Requires collateral to secure the loan. The collateral can be seized by the lending institution if the borrower defaults on the loan. | It does not require collateral to secure the loan. The lending institution approves the loan based on the borrower's creditworthiness and net worth. |
| Interest Rate | Typically have lower interest rates as compared to unsecured loans. | Typically have higher interest rates as compared to secured loans, as the risk is considerably high. |
| Approval Criteria | Lending institutions usually require the value of the pledged collateral and may also consider employment status and income before approving a secured loan. | Lending institutions usually rely heavily on the borrower's credit score and financial history when approving an unsecured loan. |
| Repayment Terms | Generally have longer repayment terms as compared to unsecured loans. | Generally have shorter repayment terms as compared to secured loans. |
| Utility | Availed for bigger purchases like buying a house or a car | Availed for smaller purchases like education, travel, etc. |
| Examples | Examples of secured loans include mortgages and auto loans. | Examples of unsecured personal loans include student loans, marriage loans, etc. |
To Conclude
Choosing between a secured or an unsecured personal loan is a crucial decision that requires careful consideration of several factors, such as loan amount, interest rates, repayment terms and collateral requirements. While secured loans offer lower interest rates and longer repayment terms, unsecured personal loans do not require collateral and are often approved based on your creditworthiness. Ultimately, the decision on which type of loan to choose should be based on your financial situation and goals.
It is recommended to carefully evaluate the pros and cons of each option, assess repayment capabilities and determine the loan amount required before making a decision. At Shriram Finance, we offer unsecured personal loans for education, wedding, travel, home renovation, etc. Apply for the Shriram Personal Loan to get started.
FAQs
1. Why is a secured personal loan cheaper than an unsecured loan?
A secured loan is cheaper than an unsecured personal loan because it is less risky for lending institutions. Since secured loans require collateral, lending institutions can recover their losses if the borrower defaults on the loan. This lowers the risk for lending institutions, which allows them to offer lower interest rates. In contrast, unsecured loans do not require collateral, making them riskier for lending institutions, which translates into higher interest rates for borrowers.
2. Are secured loans risky?
Secured loans can be risky for you if you are unable to repay the loan, as the collateral pledged to secure the loan can be seized by the lending institution to recover their losses. Additionally, secured loans can also be risky for borrowers who take out loans with variable interest rates, as their payments may increase over time.
3. How long can a secured loan last?
The length of a secured loan can vary depending on the lending institution and the type of loan. For example, a mortgage loan may last for 15, 20 or 30 years, while an auto loan may last for 3 to 5 years. Generally, secured loans have longer repayment terms as compared to unsecured loans. However, longer repayment terms also mean paying more EMIs and ultimately, more interest. It is important to carefully consider the repayment terms and interest rates of any loan before accepting it to ensure that it fits within your budget and financial goals.
