Loans are a helpful financial tool. Whether you're buying your dream home, paying for your child’s education, managing a sudden medical expense, or expanding your business, a loan can help make it possible. But before you apply, there is something you should understand not all loans are the same. There are two major types, secured and unsecured loans and the one you choose can affect how much you borrow, the interest you pay, how long you repay, and what happens if you miss a payment. In short, knowing the difference between secured loan and unsecured loan is important for making the right financial decision.
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Why it is important to know the difference between secured and unsecured loans?
Choosing the right type of loan is about more than just getting money it is about how you repay it and what you’re putting at risk.
A secured loan is backed by something you own, like your house, car, or even your investment portfolio. This is called collateral. If you fail to repay the loan, the lender can take this asset to cover their loss.
An unsecured loan, on the other hand, doesn’t require any collateral. The lender gives you money based on your credit score, income, and overall financial history. Because there’s no asset involved, interest rates are usually higher to balance the lender’s risk.
This basic difference affects everything from loan amount and approval speed to what happens if you default. That’s why it is essential to understand what you’re signing up for.
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What is a secured loan?
A secured loan is a loan where you pledge an asset like a house, gold, or your investments as security. The lender uses this asset as a backup in case you fail to repay. This type of loan offers several benefits, especially if you are borrowing a large amount or have a low credit score. Because the lender has security, the risk for them is lower. As a result, they’re often willing to offer lower interest rates, larger loan amounts, and longer repayment periods.
Key features of secured loans:
Collateral is required – You must pledge something valuable, such as your home, car, or investments like mutual funds or shares.
Lower interest rates – Since the lender is taking less risk, they usually offer lower rates.
Higher loan amounts – The value of your collateral often determines how much you can borrow.
Longer repayment tenure – You can repay the loan over several years, which can reduce your monthly EMI.
Risk of losing the asset – If you do not repay the loan, the lender has the legal right to take your pledged asset.
Let us say you need Rs. 10 lakh for a child’s higher education and have a portfolio of shares worth Rs. 15 lakh. Rather than breaking your investments, you could take a loan against your securities and repay it over time.
