Secured Loan Vs. Unsecured Loan: What is the Difference?

A secured loan is typically a better option than an unsecured loan as it has easier eligibility criteria, has a lower interest rate and allows you to borrow a higher amount. The only downside is that the lender can repossess your property in case of default.

When you are looking to borrow money, you will have to decide whether to opt for a secured loan or an unsecured loan. If you are wondering what is the difference between the two – read on to find out, and we also offer a few tips on how to choose between them.

What is Collateral?

When a borrower opts for a secured loan, they need to pledge a valuable asset in the form of collateral. Collateral is required for secured loans such as auto loans or mortgage loans.

For instance, the vehicle itself is the collateral for a car loan. The different types of loans that require collateral are

Mortgage Loan: Loans taken to purchase a residential or commercial property require the borrower to pledge the property purchased as collateral. Similarly, a loan against property allows one to borrow a large amount of money by pledging an immovable asset such as a residential or commercial property as collateral.

What is a Secured Loan?

When a borrower pledges a valuable asset to secure a loan, it is referred to as a secured loan. In case the borrower is unable to repay the loan, the lender has the right to repossess the pledged asset in order to recover their dues.

There are many examples of secured loans; loan against property and home loans are the most common ones. Certain loans, such as loan against securities require borrowers to pledge financial assets such as mutual funds, shares, bonds, etc. as collateral. 

Borrowers opt for secured loans when they require  a large amount at a lower interest rate and a longer tenure. The examples of secured loans are: 

• Vehicle loans
• Home loans
• Mortgage loans 

At SMFG India Credit, we offer loan against property and loan against securities to eligible borrowers at attractive interest rates. 

A secured loan is a type of loan in which a borrower pledges an asset such as a car, property, or equity etc., against that loan. The loan amount made available to the borrower is usually based on the value of the collateral.

Even though lenders repossess the collateralized property, you may still end up owing money to them in some cases. The lender would sell the property and use the funds raised to square off the debt. Now, if the property’s market value turns out to be lower than the outstanding loan amount – you would have to pay the rest out of your pocket.

What is an Unsecured Loan?

An unsecured loan is not backed by collateral. If you default on such a loan, the lender cannot automatically take possession of your property to repay the same. Credit cards, student loans, and small unsecured personal loans are a few examples of this type of loan. Personal loans without collateral are also widely available. You typically need a stable income and a healthy credit history to get an unsecured loan.

Must Read: What are the Types of Unsecured Loans?

Differences Between Secured and Unsecured Loans

The following table gives a rough idea about the basic differences between a secured and an unsecured loan in comparison to each other.

Conclusion

Thus, both secured and unsecured loans have their merits and demerits, and depending on your individual situation and requirement, you can make your choice. For instance, if you need a large loan amount and would like a longer tenure so as to be able to manage EMI payments without facing any financial stress, a secured loan would be a good option. On the other hand, if you are in urgent need of finances (less than a week) and would like to speed up the process, an unsecured loan would be the better choice.