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Secured Vs. Unsecured Loan: What Is The Difference

By IIFL Home Loans | Published On Feb 28 2024 12:43 PM 1 min read 28 views 4545 Likes
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Loans are one of the most effective ways to finance our needs and big purchases, whether it's about meeting sudden financial requirements or making a big purchase like a home, vehicle, etc. In the arena of multiple types of loans, all these can be classified into two categories, i.e., secured and unsecured loans. The distinction between the two plays an important role in determining the major terms and conditions associated with the loan. Let’s understand both these types of loans in detail.

What is a Secured Loan?

Secured loans cover those loans that are secured against any security. Here, the borrower is required to provide tangible security to the lender like a home, vehicle, land, securities, gold, property, etc. In case the borrower defaults, the lender has the right to claim possession of the asset and sell it to recover its dues. It should be remembered that guarantees do not form part of security to classify a loan as a secured loan.

As the chances of losing funds are low for the lender, the interest rate on secured loans is quite low as compared to unsecured loans. The lenders are always assured of recovering their dues in case of any uncertainties.

What is an Unsecured Loan?

Unsecured loans are the opposite of secured loans. Here, the borrower is not required to provide any tangible security to the lender to avail of these loans. These loans are normally regarded as loans against the income of the borrower. In case the borrower defaults in the repayment of an unsecured loan, the lender has no recourse to recover its dues. Therefore, the CIBIL score, income, and banking of the borrower become important while assessing the loan application.  However, it should be remembered that defaulting on unsecured loans negatively affects the CIBIL score of the borrower, just like any other loan.

As unsecured loans have higher risk as compared to secured loans and lenders have no source of recovery in case the borrower defaults, the interest rates on unsecured loans are higher as compared to the secured loans.

Secured Loans vs Unsecured Loans – Major Differences

Following are the key differences between secured and unsecured advances:

Parameters

Secured Loans

Unsecured Loans

Security Requirement

Secured loans are usually backed by a security provided by the borrower.

Unsecured loans are not backed by any security provided by the borrower.

Interest Rate

The interest rate on secured loans is quite low compared to the unsecured loans.

The interest rate on unsecured loans is generally higher as compared to secured loans.

Easement

Secured loans are easier to procure as the lender is always protected by the asset.

The process is a bit stringent for procuring unsecured loans as the lenders do not have any security against the loan.

Amount of Loan

The amount of loan you can avail of in the case of secured loans is generally higher and depends on the amount of security as well as your income and CIBIL.

The amount of loan you can avail of in the case of unsecured loans is generally lower as compared to secured loans. It depends on your income and CIBIL.

Risk Factor

The risk for lenders is lower in the case of secured loans.

The risk of lender is generally higher in the case of unsecured loans.

Secured Loans vs Unsecured Loan – Which is Better?

You may be wondering which is better – secured loans or unsecured loans. It all depends on your needs. If you wish to buy a home, then you need to go for a home loan (secured loan). In case you need money to meet a crisis, you may apply for a personal loan (unsecured loan). What becomes important is selecting the right lender.

IIFL Home Loans has been the borrower’s choice for obtaining financing facilities for all their needs. Whether it's about home loans or business loans, IIFL Home Loans meets all your financing needs most affordably. With simple eligibility criteria and flexible terms, it ensures that you can meet all your financial requirements effortlessly. Visit IIFL Home Loans now!

FAQs

Q1: How can I know my EMI before applying for any loan?

A: You can use an EMI calculator to know the EMI you need to pay before applying for the loan. For instance, you can use the IIFL Home Loan EMI calculator to know the amount of EMI you will need to pay for your home loans.

Q2: How to use a loan EMI calculator?

A: To use the loan EMI calculator, you just need to enter the loan amount, tenure and interest rate.

Q3: What are some examples of secured loans?

A: Here are some of the common types of secured loans you can avail of:

  • Home Loans:  These include loans you can avail of to buy a new home.

  • Loan Against Property: These are commonly known as mortgage loans that you can avail of against any property.

  • Gold Loans: These are loans granted against gold.

  • Loans Against Securities: These are loans granted against securities like shares, mutual funds, etc.

Q4: What are some common examples of unsecured loans?

A: Here are some of the common types of unsecured loans you can avail of:

  • Personal Loans: These are the loans that you can avail of to meet your personal financial needs.

  • Business Loans: These are the loans that you can avail of to start a new business or expand an existing one.

  • Unsecured Working Capital Loan: These are the loans that you can avail of to bridge your working capital gap.

  • Overdraft Facility: In case of sudden payments, you can use the overdraft facility provided by your bank where you have your bank account.

  • Education Loans: These are loans that you can avail of to finance your higher education.

  • Marriage Loans: These are a type of personal loan that you can avail of to finance your marriage-related expenses.  

Q5:  What is more affordable – secured or unsecured loan?

A: Secured loans have lower interest rates and are, therefore, more affordable than unsecured loans.

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