Secured Loans Vs. Unsecured Loans: A Comparison

Introduction

Rina Abraham started her mother and baby products company in 2015 and is now ready to take her business to the next level. To do so, she immediately needs to hire more staff to cope with the increase in production and sales.

To gain capital to execute this business move she approached some financial institution. During the research, she learned that there are two different types of loans - secured and unsecured. Though she has some valuable assets to use as collateral, she is not sure about which type she should opt for.

The following article will help individuals like her understand the difference between the two types of loans better. Apart from explaining the two types, we have also listed their pros and cons so that you can easily decide which loan will be more suitable for your need. 

What are Secured Loans?

In simple terms, secured loans are backed by a collateral and extensive documentation. Such loans are granted to the applicant only upon a collateral guarantee. Based on the type of loan, collateral can be land, jewellery, fixed deposits, life insurance and others. Secured loans have high capital borrowing limit and are mostly used in cases of home loans, higher education loans, and business expansion to name a few. Since the amount is high and the tenure is long, these loans have a lower rate of interest. One key thing to note is that borrowers should avoid putting a property valued more than the loan as collateral. As that might end up in loss in case he/she is unable to pay back the loan and the collateral is seized.

Pros

• Secured loans have collaterals and undergo extensive paperwork, which poses fewer risks.

• High loan capital can be sanctioned to the borrowers for a longer tenure at a low rate of interest.

• The incremental re-payments improve the borrower's credit score. 

Cons

• In case the borrower is unable to repay the loan, the financial institution will seize her/his property for recovery. 

• If the borrower is not making regular repayments, it will adversely affect her/his credit score. 

What are Unsecured Loans?

As the name suggests, unsecured loans are devoid of collaterals. Such loans are granted only on basis of creditworthiness of the applicant, and his financial stability. Paperwork in such case is minimal but the rate of interest is high due to the short tenure and lack of secure reinforcement like collateral.

Pros

• These loans are quick and easy to be sanctioned, as they are not dependent on any collateral and paperwork. 

• There is no risk of the property being taken away as unsecured loans rely on the creditworthiness of the applicant.  

Cons

• The loan amount will not be high as in the case of secured loans.

• They generally have a higher rate of interest for a short tenure. 

• This loan is sanctioned sparingly as it is difficult for everyone to prove his or her financial capability and creditworthiness. 

Which One is Better For You?

This will completely depend upon your requirement and capability to take a certain kind of loan. Secured loans are the perfect way to benefit the most from your property. By using collateral and taking a secured loan, you will be able to avail large capital at a lower rate of interest. This can be used for any requirement be it a business expansion plan or home loan. However, since secured loans are backed by collateral, you should be careful as your assets are now under somebody else’s control.

On the other hand, those who do not have access to collateral can opt for unsecured loans. You can use this type of loan also if you are looking for a small surplus amount like money for home renovation, travel plans or contingency. An unsecured loan is best for these purposes as they are quickly sanctioned. However, only if you are confident about repaying the money at a higher rate of interest, then opt for unsecured loans.

Conclusion

Each loan is unique in its capability and its service to an array of borrowers. An applicant can consult a financial planner before taking the final call and be aware of his options for repayment. An informed choice is important to gain the right capital assistance and figure out methods that will not interfere in the repayment process.