What is a Secured Loan?
A secured loan is a loan given out by a financial institution wherein an asset is used as collateral or security for the loan. For example, you can use your house, gold, etc., to avail a loan amount that corresponds to the asset's value.
In the case of a secured loan, the bank or financial institution that is dispensing the loan will hold on to the ownership deed of the asset until the loan is paid off.
Examples of secured loans
- Loan against property
- Home equity line of credit
- Car loan
What is an Unsecured Loan?
Unsecured loans, like the name suggests, is a loan that is not secured by a collateral such as land, gold, etc. These loans are comparatively riskier to a lender and therefore associated with a high interest rate. When a lender releases an unsecured loan, he does so after evaluating your financial status and assessing whether or not you are capable of repaying your loan.
Examples of unsecured loans
- Credit cards
- Personal loans
- Student loans
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Difference Between Secured and Unsecured Loan (Secured vs Unsecured loan)
- The most important difference between a secured and unsecured loan is the collateral required to attain the loan. A secured loan requires you to provide the lender with an asset that will be used as a collateral for the loan. Whereas and unsecured loan doesn't require you to provide an asset as collateral in order to attain a loan.
- Another key difference between a secured and unsecured loan is the rate of interest. Secured loans usually have a lower rate of interest when compared to an unsecured loan. This is because unsecured loans are considered to be risker loans by lenders than secured loans.
- Secured loans are easier to obtain while unsecured loans are harder to obtain, as it is less risker for a banker to dispense a secured loan.
- Secured loans usually have longer repayment periods when compared to unsecured loans. In general, secured loans offer a borrower a more desirable contract that an unsecured loan would.
- Secured loans are easier to obtain for the mere fact that they are less risky for a lender to give out, while unsecured loans are comparatively harder to obtain.
Is a Secured Loan Better than an Unsecured Loan?
Apart from being easier to obtain, the contract on a secured loan is usually more favourable for a borrower than an unsecured loan. Often times, the repayment periods are a lot longer, the interest rates are lesser, and borrowing limits are higher. All these factors imply that opting for a secured loan is more beneficial for a borrower.
Ever lenders prefer secured loans over unsecured loans as they are less risker to dispense. Since borrowers have to provide an asset as collateral to obtain a secured loan, there is a degree of certitude in the mind of the lender. The lender is assured to get back the money loaned out, and even if he doesn't the asset can be used to recover the loss of non-payment.
FAQs on Secured Loan
- What is a secured loan's major benefit?
Due to the lower risk to the lender, you would be able to ask for higher sums of money when it comes to secured loan. Some lenders provide unsecured loans with longer repayment periods and lower interest rates. Due to the collateral, obtaining a secured loan might be simpler.
- What are some examples of secured loan?
Car loan, home loan, and loan against property are some examples of secured loans.
- What are some examples of unsecured loan?
Student loans, personal loans, and credit cards are some of the examples of unsecured loans.
- What is the main difference between secured and unsecured loan?
The collateral needed to obtain a loan is the key distinction between a secured and an unsecured loan. When applying for a secured loan, you must deliver an item that will serve as collateral for the loan. As opposed to secured loans, which require collateral such as assets, unsecured loans do not.
- What is the definition of unsecured loan?
Unsecured loans are loans that are not backed by a valuable asset, such as gold or real estate. These loans carry a higher interest rate since they pose a greater risk to the lender. When a lender approves an unsecured loan, he does so after examining your finances and determining whether you have the ability to pay back the loan.
- What are the disadvantages of secured loans?
The personal property listed as collateral for the loan is in jeopardy. If you run into financial trouble and are unable to pay back the loan, the lender may seize your property. Usually, the borrowed funds can only be used to buy a particular object, such a house or a car.
- Is obtaining a secured loan challenging?
No, obtaining a secured loan is not challenging. As you will be providing a collateral for the loan, it will not be difficult to obtain.
- Is it possible to pay-off secured loan early?
Yes, it is possible to pay-off secured loan early.
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