What Are Secured and Unsecured Personal Loans?

Apr 25, 2022

4

min read

P

ersonal loans come in different forms, mainly secured and unsecured loans. If you are thinking of applying for personal loans, you may want to research and understand what secured, and unsecured loans are.

Both secured and unsecured loans have their perks, and you need to understand them to select the loan that fits your needs and requirements.

What Are Secured Personal Loans?

Secured Personal Loans are loans secured by collaterals or possession of the borrowers. If the borrower defaults on the loan, the lender has the authority to confiscate the collateral kept.

These loans require collateral to borrow the loan, and usually, the collateral value should be more than the loan amount borrowed. The lender will then hold on to the ownership of that security until the loan is fully paid off.

Thus, secured personal loans are less riskier to the lender and have a comparatively lower interest rate.

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However, the major disadvantage of this loan is that it requires collateral to borrow the money, and if you do not have any security to keep as collateral, you cannot borrow the loan.

Pros Of Secured Personal Loan

Low-interest rates
High borrowing limits.
Long term loans
Faster loan processing.
Variety of loan products.
Customizable loans.
Ideal for the people with unstable income sources and low credit scores
Flexible repayments.

Cons Of Secured Personal Loan

You can lose your collateral.
Lengthy loan process
Requires many documents

What Are Unsecured Personal Loans?

Unsecured personal loans do not require any collateral to borrow the loans. They are lent based on the borrower's credit score and credit profile.

If you have a good credit history and profile, the lender can trust that you will pay your debt and provide you with the loan without any security.

However, unsecured personal loans are very risky to the lender because if the borrower defaults on the loan, the lender cannot deem the money. While it may seem beneficial for the borrower, it causes more harm than anyone else.

Once you default on the unsecured personal loan, your credit history will be severely damaged, which means you might not get any more loans in the future. The lender can even lodge the case in court and sue the borrower in severe cases.

In an unsecured personal loan, the trust is the collateral, and you may need to pay a hefty price if you break that trust.

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Pros Of Unsecured Loan

No security or collateral required
Simple application process
No risk to the personal property
Ideal for people with no assets to keep collateral.
Ideal for a start-up business.

Cons Of Unsecured Loan

Huge damage to your credit score if you default.
The lender may sue you if you default.
Low borrowing limits
High repayments.
High-interest rate.

Key Differences Between Secured And Unsecured Loans

Secured Loans VS Unsecured Loans: Which One Is Best For You?

It depends on your situation to determine which loan would be best for you. There are circumstances in which borrowing unsecured loans are better than a secured loan and vice versa.

Here are some conditions you may consider while deciding on a loan.

Loan Purpose

Usually, secured loans are for a specific purpose, whereas unsecured loans are for a general purpose.

For instance, if you are thinking of starting a small business and don't want to use your personal assets to borrow a loan, you can opt for an unsecured loan.

But of course, there are unsecured business loans available. Still, if you borrow a business loan, the lender would require you to provide business-related documents such as tax returns, company registration documents, etc. This can be a hassle, especially if you are unsure about the business and its plans.

For such cases, you can opt for an unsecured personal loan. However, there might be some restrictions. It's better to know the restrictions where you cannot use a personal loan. Usually, lenders allow borrowing for small business purposes.

Loan Term

Secured loans are long-term loans ranging from 30 years, whereas unsecured loans are short-term loans, usually between 1 and 10 years.

For instance, if you are looking to purchase a car, you have either a secured auto loan or an unsecured auto loan.

But, if you take a secured auto loan, the loan term is longer, which means reduced loan repayments. However, if you take an unsecured auto loan, you might need to pay more monthly repayments.

Loan Process

Unsecured loans are ideal for borrowing for short-term purposes and emergency purposes. Since unsecured loans are approved based on credit scores and history, it is quicker to process the loan.

It takes time to process the secured loan since you have to provide the collateral and the lender needs to value your collateral to know its worth and lend you money that is less than the value of your collateral. Also, secured loans require many documents compared to unsecured loans.

Credit Scores

Unsecured loans are approved based on credit history and credit profile. If you have a strong credit score, you can qualify for unsecured loans, whereas you will be rejected if you have low credit scores.

Secured loans are for anyone with good or bad credit scores. Of course, having good credit scores can lower your interest rate, but even if you have a bad credit score, you can get your loan approved as long as your collateral is worth more than your loan amount.

Conclusion

Secured loans are loans backed by collateral, whereas unsecured loans are not backed by collateral but by your credit history and credit score.

Both secured loans and unsecured loans can help you to fund the loan. Each has advantages and disadvantages, and thus, you need to analyze which loan fits your needs the best.

When it comes to any loan, shop around with numerous lenders and compare their rates and fees to ensure that you're receiving the best rates for your financial situation.