Secured Loan vs Unsecured Loan: What’s The Right Choice For You?

By Adhil Shetty | August 7, 2017

Secured-loan-Vs-Unsecured-loan

Loans are a crucial financial tool in achieving goals such as buying a house or car, funding higher education, meeting an immediate personal need, and so on. They help you leverage your financial capacity. Loans can be of two types — secured and unsecured. While unsecured loans are borrowed on the basis of the borrower’s creditworthiness without any collateral against it, secured loans require collaterals to be pledged.

Car Loan, loan against property, loan against fixed deposit, loan against gold jewellery, and Home Loan are examples of secured loan products. Personal Loan and Credit Cards are types of unsecured loans.

Both serve different purposes. So, while applying for a loan, you must pick the type that suits your needs. Secured and unsecured loans vary in terms of tenure, interest, eligibility requirement, etc.

Which type of loan should you pick?

The loan type you choose would depend on your requirement in terms of tenure, loan size, purpose, interest, etc.

If you have sufficient liquidity, asset backup and collateral available to pledge against the loan, you can go for a secured loan as it would cost you a relatively lower interest rate. Say, you have a Fixed Deposit with a bank and you require a loan, you can take it against the FD at an interest of around 1% to 2% spread over the FD interest rate.

If your CIBIL score is not sufficient for taking an unsecured loan, you can go for a secured loan. You can improve your score eventually by repaying the loan on time.

For long-term loans, banks typically ask for collaterals to cover the risk. However, if your requirement is for a short period of time, between six months and two years, banks assess your repayment capacity based on your income and offer a Personal Loan without asking for any collaterals. Such loans typically come with a comparatively higher interest rate, and there may be pre-payment penalties as well.

Usually, banks offer unsecured loans to existing account holders who have a good transaction history and an outstanding CIBIL score.

Secured vs. Unsecured Loan

Points Secured Loan Unsecured Loan
Interest Rate Interest rate is low as collaterals are pledged and the risk is low High interest rate. Interest charged based on the tenure and size of loan, etc.
Availability Easily available Good credit score and sound banking relationship required
Tenure Available for short to long term. Example – loan against FD for short term and Home Loan for long term Available for short to medium term. Example – Personal Loan, higher education loan
Size of Loan The loan amount is relatively higher. The amount is determined based on the availability of collaterals The amount of loan offered depends on the income and credit score of the borrower. The cap is relatively lower.
Processing Time Takes longer due to the verification steps involved Loan disbursal is quicker due to lesser paperwork
Rejection Chances Low, depends on the loan requirement and the availability of collaterals to pledge against the loan High, depends on the credit score and the income level

While unsecured loans are easily available, it is recommended you opt for them when there’s an urgent requirement for liquidity. If you have too many unsecured loans, or if you’ve put in too many applications for such loans, it will reflect a credit-hungriness on your part which would erode your credit score.

However, remember that disciplined repayment of an unsecured loan can also help in improving one’s credit score. Often, a Credit Card is your first form of credit, and it lays the foundation for your credit history.

While availing an unsecured loan, do not pledge a collateral with a value higher than what’s required by the bank. Instead, you can pledge two or more smaller assets to match the value of the loan. Repay your loans in a timely manner, and review your loan balance from time to time.

(The writer is CEO, BankBazaar.com)

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
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Adhil Shetty

About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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