Unsecured vs Secured Loan: Which One Should You Choose?
5 min read | 5 months ago
Should You Choose an Unsecured Personal Loan Or A Secured Loan?
There are two kinds of loans that you will find in the market today, namely secured and unsecured loans. If you choose to get personal loans, remember they may be in the unsecured category. The question is, should you opt for unsecured personal loans or secured loans instead? The answer depends on the differences between these loan types and your objectives. Let us find out more in this article.
Secured Loans
A secured loan requires collateral/security in the form of an asset. It can be the item bought with the loan, namely a home or car, or any additional security given to obtain funds (insurance policies, investments, gold, etc.). In the first scenario, the lender will hold the original title/sales deed of the home or car ownership papers until you repay the loan in full.
Secured loans are common ways to raise higher amounts as well. You may mortgage your home or stocks, bonds, and other investments to raise funds for various purposes. The risk here is that if you cannot repay the loan, the lender will sell off the asset to recover the dues. Yet, secured loans usually have lower rates of interest since they are backed by assets. They also have higher borrowing limits and longer repayment tenures. Yet, the processing time for these loans is also longer due to higher paperwork and other formalities.
Some examples include home loans, loans against property, car loans, business loans, etc.
Unsecured Loans
These are loans that do not require any collateral/security. You can get personal loans based on your income and credit score without providing any collateral. Some examples of these loans also include student loans and credit cards. Lenders have higher risks with these loans, and the interest rates are thus higher than secured loans.
Your current income and debt will influence your loan eligibility with your credit score, employment type, employment history, credit history, and savings or investments. The tenures of these loans are usually shorter although the processing times are faster since not much paperwork is involved. The borrowing limits are also smaller in comparison to secured loans.
Comparison Of Advantages and Disadvantages For Each Option
So what are the pros and cons of both these loan types? Here’s looking at the same below.
Advantages of Unsecured Personal Loans
- Faster processing time
- Minimal documentation
- You can use the funds for any purpose
- Lenders cannot sell off assets in case of loan defaults
- No security or collateral is necessary
Disadvantages of Unsecured Personal Loans
- The borrowing limits are shorter
- Interest rates are often more than secured loans
- Processing and origination fees apply on the loan across some lenders
- Those with poor credit scores or lower income may find it hard to qualify for funding
- Loan defaults may affect credit scores badly
Advantages of Secured Loans
- Eligibility criteria are not as stringent
- Interest rates are often lower than unsecured loans
- Borrowing limits are higher
- Tenures are longer
Disadvantages of Secured Loans
- Lenders can sell assets to recover money in case of loan defaults
- Ownership of assets like homes or cars stays with the lender until full loan repayment
- You have to provide security/collateral to obtain funds
- There are restrictions on what you use the loan for
- Longer processing times with a lot of paperwork
Conclusion
Now that you know the pros and cons of these loan types, which one should you choose? It all depends on your objectives. If you want to borrow a smaller amount for diverse purposes like home renovation, medical emergencies, travel, higher education, gadget/appliance purchases, and the like, then you should get personal loans.
You will receive the funds faster if you meet the eligibility criteria and can comfortably clear your dues over a shorter tenure. If you want to raise a higher amount to meet any urgent need, you can consider a secured loan instead. However, remember that you will have to put your assets on the line for this purpose.
FAQs
1. What is the average tenure of personal loans?
The usual personal loan tenure is up to 36 months. Some lenders may offer higher tenures.
2. What is the average tenure of a home loan?
Home loan tenures vary across lenders. In most cases, they range between 15-30 years.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
