Distinction between Secured and Unsecured Loans

Several banking and non-banking structures in a country offer the loan service. The main purpose of these loans is to fulfil the credit needs of the person. The loan can be granted for several reasons like home loans, business loans, car loans, etc. 

These loans are segmented into two categories further depending upon the security they ask for. These two types are secured and unsecured loans. The type of loan needs to be determined before filing your loan application. However, people are often confused about both types of loans and their terms. 

So, here we will talk about the difference between secured and unsecured loans. We will also help you compare both to find the best possible option for you. 

What is a Secured Loan?

Secured loans are the type of credit guaranteed with security or collateral. The borrower needs to offer an asset in exchange for the loan amount. Mostly in secured loans, the item of loan like a car, home, etc., is considered collateral by default. The ownership or the right to sell the item remains with the lender until the borrower pays the entire secured loan amount. 

However, there is also an option of putting other items as the collateral for the loan. It can be your personal property, stocks, etc. One difference between secured and unsecured loans is that secured loans can allow more significant borrowing amounts. This is because the secured loans offer lesser risk to the lender, so he is keener to provide more significant amounts. However, the promise of repayment still holds the most critical value in the loan application process. 

You can apply for secured loans for a variety of purposes. Such as there are secured business loans, secured car loans, secured home loans, home equity lines of credit, etc. The home equity loans are based on the current cost of your home. Then, the loan amount gets subtracted from the total amount. When the borrower cannot pay the loan, the lender sells the collateral and covers his loan amount.  

Benefits of Secured Loans

Secured loans come with mainly three advantages over unsecured loans. The benefits which distinguish between secured advance and unsecured advance are as follows:

• Secured loans come with lower rates of interest compared to unsecured loans. The credit for the decrease in interest rate also goes to the higher security and less risk of non-repayment in secured loans due to collateral. 
• Borrowers get higher borrowing limits in secured loans. This makes it suitable for people who don’t even have seed funds for their purchases. 
• Also, secured loans come with longer repayment terms. This means the tenure to return the loan amount along with the interest rate is more flexible. 

Let’s see some of the common secured loan types:

• Mortgage

It mainly consists of home loans. In mortgage payments, the borrower becomes subjected to pay insurance, interest rate, tax, principal, etc. 

• Home Equity Line of credit

It is also famous for its abbreviated form HELOC. A borrower can get money on the collateral in different segments. 

What is an Unsecured Loan?

As the name suggests, unsecured loans are the type of loans where you don’t need to pay any collateral or security. This loan comes with a higher risk for the lender. In the case of non-repayment, there is no alternative for the lender to recover his money. That’s why the interest rate on such loans is also higher. Moreover, the number of loans also comes with restrictive limits. 

You get less amount on credit with unsecured loans compared to secured loans. Once when a borrower applies for unsecured loans and if the request gets rejected, he can still apply for a secured loan. In unsecured loans, the lender goes through the borrower’s financial resources. He only gives unsecured loans if he finds them reliable and capable of paying off the loan amount. There are five Cs for unsecured loan options: character, capacity, collateral, capital and conditions. 

Advantages of unsecured loans

The unsecured loan comes without collateral. That’s why if you need urgent funds and don’t have an asset as security, you can still opt for unsecured loans. 

Unsecured loans are like;

• Credit cards

Generally, credit cards offer you monthly credit, and you need to pay service interest on them. It is also divided into personal lines of credit and personal loans. 

• Student loans

These loans are provided to the students for mostly completing their higher studies. 

Difference Between Secured and Unsecured Loans 

The collateral aspect is the most crucial point in distinguishing between secured advance and unsecured advance. You don’t need to offer collateral to the lender in unsecured loans. Here, we are stating some more differences between secured and unsecured loans;

• Another difference between secured advances and unsecured advances is the interest rate they charge. The interest rate on unsecured loans is higher due to the concern of higher risk. 
• Also, sanctioning a secured loan is much easier than an unsecured loan. It is because the lender can easily grant the loan amount without worrying about the financial aspects of the borrower. On the other hand, the borrower must provide proof of his income, guarantee repayment for the unsecured loans, and several other documents. 
• The secured loans also offer longer repayment tenure compared to unsecured loans. 

Conclusion 

The difference between secured advances and unsecured advances suggests that secured advances are much better options for borrowers. They are easy to obtain and come with better flexibility. The repayment period of secured loans is also more extended than unsecured loans. You can opt for secured loans for car loans, business loans, home loans, etc. In the long term, the difference between secured and unsecured advances suggests that secured loans are much better choices. However, unsecured loans are your only option if you require loans without any collateral or guarantee.