While seeking an easy personal loan, the first thing which you will have to make a decision on is whether to pick a secured or an unsecured loan. Both types provide financial freedom, however, they operate in a very different manner and are meant for various situations. Knowing the main differences between the two will enable you to choose the right one that matches your financial requirements, credit record, and repayment ability.
Borrowing for a major purchase or a medical emergency are examples, but no matter the reason, if you select the appropriate loan type, this will not only ensure that you receive the necessary funds but you will also be able to repay the loan more comfortably.
What is a Secured Personal Loan?
A secured personal loan means that you have borrowed money against an asset. The asset can be your fixed deposit, gold, property documents or any other asset agreed by the lender. If the debtor fails to meet their obligations, the lender can sell the asset to recover the money.
Since secured loans involve significantly less risk on the part of the lender, they usually come with lower interest rates and other favorable conditions. Poor credit score borrowers also have better chances of obtaining a secured loan if the collateral is valuable and easily tradeable.
What is an Unsecured Personal Loan?
Unsecured loans are those which are obtained without providing any security. The decision of approval depends solely on your income, credit score, job status, and existing debts. These loans are very popular and are mostly used for medical expenses, travel, weddings, or for short-term financial needs.
Since it is unsecured, the lender carries higher risk, which is reflected not only in tougher eligibility criteria but also in slightly higher interest rates that are still lower than security options.
Key Differences Between Secured and Unsecured Personal Loans
Collateral Requirement: Secured loans must have a pledged asset. Unsecured loans do not. This is the most fundamental difference. If you have no assets to use as security, you will have to choose an unsecured loan.
- Approval Criteria: With acceptable collateral, secured loans are usually easier to get approved, even if your credit score is low. Unsecured loans usually require good credit and a steady income.
- Interest Rates: In most cases, the interest rates on secured loans are lower because the lender’s risk gets reduced due to the presence of collateral. If a low-interest personal loan is what you are after, you might want to choose a secured option.On the other hand, unsecured loans have higher rates compensated for the risk of lending without security. On the contrary, if you have an excellent credit profile, it is still possible to get competitive rates.
- Loan Amount and Tenure: Secured personal loans generally provide larger loan amounts and longer tenures, based on the value of the asset you pledge. This means the loans can be used for big purchases or long-term financial goals.Unsecured loans usually are capped or limited by your income and credit profile and have a tenure of 1 to 5 years.
- Processing Time: As there are no asset verifications involved, the processing of unsecured loans is quicker. In the case of secured loans, additional documentation and legal checks that are necessary for the pledged collateral may increase the time.In case you want to get money quickly, an unsecured loan may be the faster option. However, it does not always guarantee that it will be the cheapest one.
On the other hand, defaulting on a secured loan, e.g., by non-payment, means that you are at risk of losing the asset that you have pledged to the bank. If you, however, cancel an unsecured loan, the only consequences are that your credit score will be affected negatively and, if the case is extreme, the creditor may bring a lawsuit, but your personal assets will not be directly at risk.
That makes unsecured loans a safer option in terms of losing assets but if the situation is not well handled they can be worse for your credit health.
What Is the Best Option for You?
Get a secured loan, if:
- You have an asset that you can gladly give as a pledge
- You definitely want a lower interest rate and a bigger amount of money
- Your credit score is not high enough for an unsecured loan
Opt for an unsecured loan in case:
- You are in a hurry for money
- You do not have, or you do not want to risk, collateral or personal assets
- Your credit history is good and your income is stable
Each of these offers has its place. The best option relies on the most important factors, like how fast you need the money, are you comfortable with the idea of pledging assets, or whether you want lower interest rates or faster processing.
Is a Secured Loan Always a Low Interest Personal Loan?
It is not necessarily so because the rate of interest is primarily determined by the lender’s policy and the quality of the asset as well as your overall profile. Secured loans, in most cases, are a safe and efficient way to get a low rate personal loan if those loans are tied to high-value assets like a home or a fixed deposit account.
Conclusion
Both types of personal loans, that is, secured and unsecured, have benefits and drawbacks. Secured loans, although offering lower interest rates and higher borrowing limits, involve the risk of losing the asset. Unsecured loans, on the other hand, provide the user with comfort and quickness but usually the cost is higher. You can select the most appropriate and the cheapest interest personal loan option that matches your objectives by knowing the main differences and assessing your financial situation.