What are Secured Vs Unsecured Loans?

In need of credit, a loan acts as the best way to meet the required expenses. There are various loans available in the market for different purposes, such as housing loans, car loans, personal loans, education loans, and others. A personal loan is specially curated to meet urgent or sudden expense needs. All these loan options can be categorised into secured or unsecured based on the security provided by the lender. In this blog, we will understand the concept of secured vs unsecured loans. Let’s begin with the basics.

What are Secured Loans?

In a secured loan, you have to provide security, i.e. tangible assets, to the bank and can’t provide intangible assets like guarantees to the lender for a loan. Some of the common tangible assets that are considered are real estate, vehicles, securities, jewellery, and others.

The financing cost associated with secured loans is comparatively lower, plus the borrowing terms are also lenient. It is due to the fact that collateral-backed loans are less risky for the lender as they have an assurance of repayment.

In the case of default, the lender has the legal right to take possession of the submitted asset or collateral. This is done so that the lender may recover the money that you borrowed from them.

What are Unsecured Loans?

In unsecured loans, the borrowers are not required to provide any tangible security to the lender while applying for a loan. However, in unsecured loans, the financing costs are quite high, as there is more scrutiny of the borrower's creditworthiness due to the lack of security. The creditor primarily evaluates your ability to repay the debt before granting you the loan. Among other things, this is accomplished by examining your bank account statements and CIBIL score. Having a reliable source of income can make it easier for you to get an unsecured loan.

An unsecured loan is a good option if you don’t have any collateral to pledge but need urgent money.

Pros and Cons of a Secured Loan:

Pros:

1. Eligibility even at a Lower Credit Score: Even if the borrowers have a poor credit score and they are ready to provide collateral as security, they can easily get a secured loan

2. Higher Limits of Borrowing: The limit of borrowing is directly proportional to the value of the collateral.

3. Lower Financing Costs: Secured loans tend to have lower financing costs as the collateral offsets the borrower’s credit risk.

Cons:

1. Risk of Property Loss: In case the borrower defaults on the loan, the lender can seize the property or recover the loan by selling the asset.

2. Asset Tied Up: In some cases, you lose your access to the asset if you have put it as collateral.

3. Loan Use Restrictions: Many secured loans limit how you can use the loan amount. For example, a mortgage can only be used to pay for real estate.

Pros and Cons of an Unsecured Loan:

Pros:

1. No need for Collateral: You don’t need to submit collateral, but if you default, the lender can take legal action against you.

2. Faster Approval: Since there is no collateral, and if the credit score is good, the process gets expedited. That’s the reason why it is easier to get a personal loan.

3. Fewer Use Restrictions: You can use the funds of an unsecured loan for almost everything (except things like gambling and illegal activities).

Cons: 

1. Stricter Eligibility Requirements: In comparison to secured loans, you must have a good credit history, credit score, and other parameters to qualify for an unsecured loan.

2. Lower Loan Limits: The loan limits are also lower in comparison to the secured loans.