We all are familiar with loans but the tree of loan has its branches! Most loans fall into two basic categories named as Secured and Unsecured. Secured loans are those which are backed by a security or an asset of some sort which means that if borrower defaults then lender can take possession of asset and redeem it to cover the amount of loan along with the interest. Secured loans basically consist of home loan, vehicle loan, gold loan etc.
Unsecured loans are free from all sorts of collateral. It signifies personal and credit card loan which are short in term, amount and tenure!
While both the loans have separate set of characteristics, both unsecured and secured loans are like two twin brothers who are absolutely opposite from each other. We are saying this because the merit of secured loan is actually a demerit for unsecured loan and vice versa! Take a look!
Deep dive into both loans
Quantum of funds: You should go for secured loan when you need access to more money and that too for longer tenure. This is because in secured loan, you are backed by the security of your assets and thus lender provides the loan near to the amount of security willingly. On the other hand unsecured loans allow you to borrow only limited amount of money. This is because you give no security to the lender and he is at utmost risk all the time! Therefore you can have access to smaller amount of funds through unsecured loans!
Rate of interest and availability: Unsecured loans are quite risky and hence are available at comparatively higher rate of interest. Also the lender relies on your credit score before granting this loan and hence its availability cannot be assured. The other side of the coin is completely reverse! Secured loans carry a lower rate of interest because they are for longer duration and the value of the property acting as collateral keeps on changing. Unsecured loans carry higher rate of interest as opportunity cost for the lenders is high but in unsecured loan the higher the value of property, the less will be the opportunity cost! When you are ready to pledge goods worth $100 for a loan of $70 then it leave no scope of negation!
Process: The processing time of a secured loan is much more than unsecured loan. The approval process, due diligence and valuation of property consumes a lot of time. Unsecured loans are very prompt in delivery if the particular matches the relevant criteria of the lender.
Which loan to choose?
The choice of type of loan will purely depend upon your requirement. If you are planning to invest into home which includes the extensive repairs then unsecured is a strict No-No! On the other hand if you are planning to skip your credit card payment to meet some urgent need then it is better to apply for unsecured loan as skipping the payment can lower down the credit score as well! No matter which types of loan you choose, one thing to you need to assure is that you don’t borrow more than your capacity to repay!