What's the Difference Between a Secured and Unsecured Loan?

Taking loans has become as regular as going shopping for a new wardrobe, sometimes without even you realizing it. Simple phenomena of opting for postpaid bills on Ola, or your pay later credit stores are in one way or the other your indulgence in the entire system. The next purchase on EMI via Amazon or Flipkart, or opting for postpaid mobile balances, you are in the constant loop of taking and paying off loans. Having made you familiar with the concept, in this write up, we will talk about a rather severe and advanced theoretical and practical application of taking loans. 

Categorically, loans today are divided into two major types - secured loans and unsecured loans. To simply differentiate the two with a one-liner, a secured loan requires you to put any of your valuable assets as collateral while taking the loan, while there is no such requirement while opting for an unsecured loan. 

While it may sound like an easy point of differentiation and a deal-breaker of your understanding of the subject, the nitty-gritty in both scenarios makes a stark difference. There is a lot more ground to be covered on the subject - the difference between secured and unsecured loans, before making a final decision of going ahead with your selection. 

What is a secured loan? 

In layman's language, a secured loan is credit given to you by a lender who in turn holds back one of your valuable assets as collateral that can be used for a down payment in case of payment default caused from your end. When you take a secured loan, the sum acquired is usually high and needs specific backing up for release by the lender. Hence, assets like your house, your gold, shares, or mutual fund, etc., are taken under the possession of the bank/lender to use as a sense of security for the amount given for your immediate benefit. 

Advantages of Secured loan

• Greater value for money
• A higher range of credit
• Lower rate of interest
• Longer pay-off duration
• Credibility for the lender
• Resourceful in case of higher sum requirement

Types of Secured loan

• Mortgage loan:

A house loan is taken against your newly purchased property which can be both personal or for your business. The lease of the purchased land is not entirely released in your name until the entire payment has been made to the lender, in this case, the bank. An approximate 20% of the total value has to be paid right then to get this loan, and the rest of the amount is distributed over a period of time. 

• Loan on Vehicles:

While purchasing any automobile such as a car or a two-wheeler, you can opt for a secured loan and instead of exhausting your savings in one go, pay the smaller amount in a defined duration and on the final pay off, claim the full ownership of the papers of the vehicle.

• Loan against gold:

Since gold is an elite and premium possession in our society, your acquired gold is often used as collateral at the time of applying for the loan, making you eligible for a certain percentage of credit of the overall value of the gold deposited.

• Loan against shares and funds:

On the lines of the loan against gold, your mutual funds work as a tool of your secure investment that can be held as an asset for collateral when opting for a secured loan. As for the shares and the funds, when put as collaterals, the financial organizations measure the creditable value, keeping in mind the market scales of those shares and also the predictable ups and downs in the value. An approx of 60-70% of the value of these shares can be accepted upon as the credit value for your loan.

• Loan against life insurance:

In some cases, your life insurance policy can also be used to back your secured loan up, with the creditable value being a percentage of the sum insured in the policy.

What is an unsecured loan?

Unsecured loans don't include any insurance from the borrower's end. Here, the solitary assurance that the lender has that you will reimburse the obligation is your reliability and your assertion. Hence, unsecured loans are viewed as a greater danger for loan specialists. You'll, by and large, need a solid record as a consumer and a higher credit score to fit the bill for an unsecured loan. 

These loans regularly accompany higher interest rates naturally, keeping the above stated in mind. Think of the contrast between the regular home loan rate and what you may pay yearly on a Visa. Balancing the portion of the additional risk taken by the lender with the exorbitant interest obligation is more challenging to pay off.

Advantages of Unsecured loans

• No assets required 
• The application process is much quicker
• Suitable for ongoing expenses of lower order.

Types of Unsecured loan

• Credit Cards:

The most commonly used unsecured loans are credit cards. Today, almost all working individuals prefer to have one at their disposal. It is a revolving loan that carries a specific spend limit putting a bracket on the amount that can be withdrawn at one given period of time, the duly reimbursements of which largely hamper your credit score in the longer run. It provides the flexibility to manage more straightforward expenses and smoothly sail through the month.

• Student Loans:

Available through both - the Department of Education and private financial giants, a student loan is again a common category that takes off an immediate burden of the education of a child, which can then be repaid slowly. This, although an unsecured loan, has tax rebate benefits as well.

• Term Loan:

A term loan or a personal loan will demand your signatures at the bottom of the sheet and will make a lump sum amount available at your disposal for a short term duration. This category of loans generally has a fixed rate of interest.

To sum up, the above-stated pointers, let's map out the difference between secured and unsecured loan.

Both secured loan and unsecured loan carry their shares of pros and cons that can be profoundly used for your better quality of life if applied for with a well-thought plan and usability. Together, they're the keys to homeownership, vehicle acquisitions, readily available credit card usage, financing your schooling, and helping you balance out your expenses adequately. However, always make sure to go ahead with your loan plan only when you 'have' to and not just for an added 'benefit'. These decisions play a significant role in your financial credibility as an individual and hence need critical balancing of scales before opted for.

FAQs

✅ What is my eligibility criteria for an unsecured loan and secured loan?

SECURED LOAN:

• You need to be 18+
• You must be a resident of India
• Most financial firms put a limit of an annual income of up to INR 3 lakhs 
• For business loans, the business must be running and show a profit for three consecutive years.
• The assets must be of a greater value than the applied amount.

UNSECURED LOAN

• The age bracket of 21-68 years
• You need to be employed/in business for 2-5 years
• Minimum monthly income to be above INR 5000/-
• CIBIL score needs to above 750

✅ What documents do I need for opting for secured loans?

Common documents needed:

• ID Proof
• Age Proof
• Income Proof
• Original Asset documents
• Bank statements of the previous six months

✅ Can I apply for both the loans at the same duration of time?

Mostly it is not advised to opt for two loans at a single point in time, and it also causes troubles while presenting the documents to the lender.