Are you looking to borrow money? During your research, you are bound to come across two types of loans, secured and unsecured. There are pros and cons to both, and before you sign the dotted lines, you need to have a clear idea of what these loans offer and how they differ. This guide will give you all the information you need to make an informed decision.
What is a Secured Loan?
A secured loan is backed by security or collateral. For instance, you can use your gold, house, etc., to avail of a loan corresponding to the asset’s value. The financial institution or bank will hold onto the ownership deed of the asset until you have repaid the loan. If you don’t repay the loan within the agreed period, the bank or financial institution has the right to seize your security or collateral as payment. Note that repossession will remain on your credit report for up to 7 years.
Features of a Secured Loan
- Secured loans are dispensed against the title of ownership of assets, which are used as security or collateral like property, assets, vehicles, or homes.
- The interest rate is lower compared to unsecured loans. This is because banks or financial institutions are not assuming the entire risk and are confident in the borrower’s ability to repay.
- Compared to regular loans, the repayment options are much more flexible.
- Secured loans are given at variable and fixed rates of interest.
- The loan approval rate is faster, and loans can be customized to meet specific needs.
- Borrowers don’t need to present any guarantor when applying for secured loans.
- The borrower’s credit score improves once the loan has been fully repaid.
- Lenders and banks have the right to repossess assets for which secured loans were taken if the borrower fails to repay them.
Examples of Secured Loans
- LAP or loan against property
- Gold loans
- Loans against insurance policies
- Loans against fixed deposits
- Loans against shares and mutual funds
What is an Unsecured Loan?
Unsecured loans do not require any collateral or security. The bank or lender dispenses the loan amount to the borrower based on the credit score, financial history, past associations, and loan repayment capability. These loans typically come at a higher interest rate because these are collateral-free loans.
Features of an Unsecured Loan
- No collateral or security is required for unsecured loans.
- The interest rate is higher than secured loans because the risks assumed by the lender or bank are higher.
- Unsecured loans do not offer any tax benefit.
- The loan amount extended by financial institutions and banks is lower than secured loans.
- The payment term is lower, and it ranges from three months to five years.
Examples of an Unsecured Loan
- Personal loans
- Short-term business loans
- Education loans
- Flexi loans
- Vehicle loans
Difference Between Secured and Unsecured Loans
|Secured Loan||Unsecured Loan|
|A secured loan is a collateral-based loan protected by security or asset.||An unsecured loan is a collateral-free loan. It is not protected by any kind of security or asset.|
|The interest rate is lower.||The interest rate is higher.
|The loan processing time is longer because the lender needs to value the asset or collateral.||The loan processing time is faster because there’s no valuation of security or assets.
|The loan amount sanctioned is based on the value of the asset, monthly turnover and other existing loans.||The loan amount is sanctioned according to the credit score and history of the borrower, along with the monthly turnover.
|Secured loans can be availed with a low credit score.||Need a high credit score to avail an unsecured loan.
|Secured loans are riskier because if the borrower is unable to repay the loan amount, the lender will take away the asset and repossess it.||There’s lower risk for borrowers but the interest rate is higher.|
|The risk assumed by the lender is lower because if the borrower cannot repay the loan, the lender can claim the asset.||The risk assumed by the lender is higher because the loan isn’t protected by any collateral or security.
|The loan amount availed is much higher than unsecured loans.||The loan amount availed is much lower than secured loans.
|Loans are available for longer tenures.||Loans are offered at shorter tenures.
|Examples: Loan against securities, Loan against property, Gold loan, loan against FD, etc.||Example: Personal loan, short-term business loans, education loans, etc.|
Apply for Secured and Unsecured Loans with Yubi
Applying for secured or unsecured loans is made easy with Yubi. Follow these steps for a seamless experience.
- Register on the Yubi platform and complete the onboarding process in a few seconds.
- After registration and onboarding, you can connect with 750+ lenders on our platform, including NBFCs and banks. You can interact with the lenders and request them to provide you with their interest rate charts, eligibility criteria, and other details.
- Go through each lender detail and select the one providing the best interest rate.
- Once you have chosen the lender catering to your specific loan requirements, you need to upload your documents online and wait for the approval process.
- Once approved, the loan will be disbursed to your account within three to five business days.
- Secured vs. Unsecured Loan: Which is Better?
Secured and unsecured loans are taken in different circumstances.
Secured loans are easier to obtain because an asset or collateral protects the loan. The interest rates are lesser, and the repayment tenures are longer. The borrowing limits are also higher. However, the loan processing time is higher because the asset or security needs to be valued by the lender.
On the other hand, unsecured loans don’t require any assets or collateral. While the interest rates are higher and the repayment tenures are lower, unsecured loans are processed faster than secured loans. The lender does not have to value any collateral so that the loan amount can be disbursed quickly.
So, whether you will apply for a secured or unsecured loan depends on your specific business requirements.
- When does it Make Sense to Take a Secured Loan?
Taking a secured loan makes sense when you want a higher loan amount at a comparatively lower interest rate. Also, secured loans make sense when you have a bad or no credit history. This is because unsecured loans are sanctioned based on the borrower’s credit history.
- Should You Consider an Unsecured Loan?
Unsecured loans are a good option in various circumstances. For instance, if you need to borrow smaller amounts to keep your business afloat or urgently need funds and cannot wait, you can apply for an unsecured loan. Unsecured loans are easier to process and disbursed quickly because the lender doesn’t have to evaluate the asset or collateral. The loan, in most cases, is approved according to the borrower’s credit score and income statement. Therefore, documentation is easier in the case of unsecured loans.
The Bottom Line
So, now that you know the difference between secured and unsecured loans, you can make an informed decision. You can quickly apply for either of these loans by registering on the Yubi platform and connecting with 750+ lenders. You can use the loan amount to purchase equipment and raw materials, working capital, or take care of other business-related purposes.