Secured Loan and Unsecured Loan in India – Key Differences
Often you might wonder which is better – whether to apply for a secured loan, or an unsecured loan. A secured loan is one where you need to pledge collateral—for example, pledge gold or mortgage your commercial or housing space or your vehicle with the lender—to avail the loan. An unsecured loan is where you do not need to provide any collateral.
Gold loans, mortgage loan, car loan, home loan are all examples of secured loans. Whereas, personal loans, credit card can be categorized under unsecured loans. They are given out on the basis of one's creditworthiness and do not require you to offer any asset as security to your lender. Here in a nutshell are the key differences between the two types of loan.
Features of a secured loan:
Collateral: The loan is secured loan, i.e., it is availed by pledging collateral. The lender uses the asset as security against payment default. For instance, if you take an auto loan and default on your payments, your vehicle could be disposed off by the lender to recover unpaid dues.
End use: The end use of the loan amount on a secured loan could be a mix of restricted and flexible. For example, the loan amount for car loans or home loans can be used only to purchase a car or a home, respectively. The car / home is mortgaged with the lender until the loan is repaid back in full. On the other hand, in the case of gold loans or a loan against property, the end use is not restricted to a specific payment.
Eligibility: You need to be at least 21 years old at the time of applying for the loan. You should be able to demonstrate a consistent source of income and employment stability and reasonable credit health.
Process: A secured loan might take some time to be approved and disbursed. It depends on the type of loan you are applying for. For example, a home loan might have detailed documentation requirements, and it can take time for all the legal, credit and personal issues to be processed. On the other hand, a gold loan has a simple application process and the loan amount can be disbursed on the same day if everything is found to be in order.
Interest rates: In general, interest rates on secured loans are lower than an unsecured loan, since lenders have your asset as collateral to safeguard their money in case of default.
Loan Amount: The customer can get a loan amount that is a certain percentage of the value of the asset that has been pledged. For instance, you can get up to 80% of the value of the property that you are buying, subject of course to certain conditions. Similarly, you can get up to 60% of the value of the property you are mortgaging for a Loan against Property.
Tenure: Secured loans are medium to long term loans and the repayment period can range from a few years to a couple of decades, depending on the lender and type of loan.
Features of an unsecured loan:
Collateral: Most unsecured loans are personal loans. It is a multi-purpose loan where you are not required to provide any asset as security. Before approving your loan application, banks do a background check on your professional details, your financial health and your credit history to arrive at a lending decision.
End Use: You could use the loan amount for any purpose – be it for buying furniture or other home improvements, for the perfect holiday, purchase of consumer durables, to fund your children's education, for your child's marriage, as working capital for your business, for medical emergency, or any other emergency.
Eligibility: Ideally, the applicant needs to be salaried or self-employed with a good net income, needs to have a good credit history, and fall in the age bracket of 21-65 years.
Process: Unsecured loans can take much less time as there is less documentation involved – e.g. no legal approvals in the case of a home loan. Some banks even offer instant loans, subject to certain conditions.
Interest rate: A personal loan/unsecured loan is one of the costliest loans in the market. Its interest rate could go anywhere up to 30% per annum or even more, depending on your credit situation. Similarly, interest rates on your credit card outstanding can be extremely high.
Loan amount: The personal loan amount could range from a few thousand rupees to a couple of lakhs depending on several criteria like your income, requirement, employer profile, credit history, lender's lending policies, etc.
Tenure: It is a short-term loan with flexible repayment period that can range between 1-5 years.
Both unsecured and secured loans have their advantages and disadvantages. You need to decide for what purpose you need the loan and choose accordingly.