With lenders today offering various unsecured and secured loans, there could be various questions that would come to your mind- what are secured loans, what are unsecured loans, and how to choose between the two types of loans. Read on to know the answers and make an informed financial decision.
What are secured loans?
Secured loans seek security from you are known as collateral. This can be an article of monetary value that the lender holds rights to until the loan is repaid. Loans against houses, gold, property and other tangible assets are characterised as secured loans. Your inability to repay the loan may result in the lender selling your security to recover the amount loaned. Interest rates and processing fees are lower in the case of secured loans.
What are unsecured loans?
Unsecured loans do not require collateral. They are given based on your credit score and income and include options such as personal loan and student loans. Your disciplined repayment of credit in the past, filing your tax returns on time, having a steady job and other factors usually render you eligible for an unsecured loan. Unsecured loans usually come with higher interest rates and processing fees as the lender, in such cases, takes on increased risk.
Choosing between secured loans and unsecured loans
To make an informed decision about picking secured loans or unsecured loans, here’s how you can decide which type of loan is best suited for your needs.
1. Your comfort with collateral
Collateral is the main component that allows you to apply for a secured loan. For example, you may pledge your house to borrow funds to start a company. Or you may pledge your investments (such as FDs or other securities) to avail money. Sometimes, lenders may have a minimum value for your collateral below which they don’t accept security. Also, the value of your security will be higher than the loan amount offered to you. Keeping these things in mind, decide whether pledging security works for you. If you are not exposing yourself to risk by pledging a valuable asset, you can opt for this loan.
2. Your monetary requirement
Secured loans offer higher loan amounts on a flexible tenor of up to 25 years in case of home loan, for example. On the other hand, an unsecured loan is sanctioned to you based on your income, credit score and other lender-specific eligibility terms. Thus, the loan amount and tenor are limited and shorter in comparison to a secured loan. So, while applying for a loan, keep your needs in mind and select the type that best suits your goals. For example, buying electronics and furniture for your new home with an unsecured loan is a good idea as you can quickly repay your loan using funds from your income.
3. Your timeline for meeting your requirements
An unsecured loan is a collateral-free loan. So, you apply for it on simple and easy terms and access it without delay. This makes these loans more adept for immediate needs such as a wedding in the family, hospitalisation costs, and home repairs. However, if you want to invest in business expansion or buy a new premise for your operations, you will need substantial funds for a longer tenor. In this case, a secured loan like a loan against property comes to your aid. An unsecured loan is a collateral-free loan. So, you apply for it on simple and easy terms and access it without delay. This makes these loans more adept for immediate needs such as a wedding in the family, hospitalisation costs, and home repairs. However, if you want to invest in business expansion or buy a new premise for your operations, you will need substantial funds for a longer tenor. In this case, a secured loan like a loan against property comes to your aid.
4. Your credit score
When you borrow a collateral-free loan, your credit score is significant as it is the primary way a lender can judge your creditworthiness. Here, a good credit score above 750 will get you a high-value loan sanction on a more competitive interest rate. On the other hand, alongside your credit score, your asset is the key to getting you a hefty sanction on flexible loan terms when you borrow a secured loan. So, if your credit score is under par, it may be more affordable for you to opt for a secured loan. If your needs are not urgent, you can also improve your credit score and then borrow an unsecured loan.
Understanding these types of loans will help you choose the right option for your needs, giving you the easiest and quickest way to tackle planned and unforeseen expenses.
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