Secured vs Unsecured Loans: Know the Differences

Posted on Friday, May 5th, 2023 | By IndusInd Bank

When you need financial assistance, taking a loan is often the most practical solution. However, before applying, it is essential to understand the different types of loans available—secured and unsecured loans.

Banks and financial institutions offer both secured and unsecured loans based on factors like credit score, income, loan amount, and repayment capability. Each type has its pros and cons, making it important to choose the one that best suits your financial needs.

This blog will break down the differences between secured and unsecured loans, their features, examples, and which type of loan is best for you.

Difference Between Secured and Unsecured Loans

The fundamental difference between secured and unsecured loans lies in the requirement of collateral. Let’s understand these two loan types in detail.

Unsecured Loans

Unsecured loans are loans that do not require any collateral. Lenders approve these loans based on your creditworthiness, income stability, and financial history. Since these loans pose a higher risk to lenders, they typically come with higher interest rates and stricter eligibility criteria.

Features of Unsecured Loans

• No Collateral Required – Borrowers do not have to pledge any asset like property, gold, or fixed deposits.
• Higher Interest Rates – Since there is no collateral, lenders charge higher interest to compensate for the risk.
• Shorter Loan Tenure – Unsecured loans usually come with shorter repayment periods, often ranging from 1 to 5 years.
• Faster Approval Process – The approval process is quicker as there is no need to evaluate collateral.
• Eligibility Based on Creditworthiness – A good CIBIL score (usually above 700) and stable income increase the chances of approval.

Examples of Unsecured Loans

• Personal Loan – Used for travel, medical emergencies, education, or weddings.
• Credit Card Loan – Borrowed as an advance on the credit limit.
• Business Loan (Unsecured) – Helps businesses with working capital or expansion without pledging assets.
• Education Loan (Unsecured) – For higher education in India or abroad without collateral (usually for smaller amounts).

Secured Loans

Secured loans require borrowers to pledge collateral (such as property, gold, or investments) as security for the loan. If the borrower fails to repay, the lender has the right to seize and sell the asset to recover the outstanding amount.

Features of Secured Loans

• Collateral Requirement – Borrowers must pledge an asset, such as real estate, gold, or fixed deposits, as security.
• Lower Interest Rates – Since the risk is lower for lenders, secured loans come with more affordable interest rates.
• Longer Loan Tenure – These loans have longer repayment periods, often ranging from 5 to 30 years, depending on the type of loan.
• Higher Loan Amounts – Lenders offer larger loan amounts as they are backed by collateral.
• Easier Approval for Low CIBIL Score – Borrowers with lower credit scores (below 700) can still qualify if they provide collateral.

Examples of Secured Loans

• Home Loan – Used to purchase or construct a house, where the property itself acts as collateral.
• Car Loan – The vehicle purchased is kept as collateral until the loan is fully repaid.
• Gold Loan – Borrowers pledge gold jewelry to get funds at lower interest rates.
• Loan Against Property (LAP) – Individuals use their commercial or residential property as collateral to secure a loan.
• Secured Business Loan – Businesses can pledge assets, such as machinery or real estate to obtain funding.

Which Type of Loan Should You Choose and Why?

Choosing between a secured and unsecured loan depends on multiple factors, such as your financial situation, loan amount requirement, interest rate preference, and risk-taking capacity. Here are the pros and cons of both to help you decide better.

To Sum Up

Choose a Secured Loan if:

• You need a large loan amount for a long tenure.
• You have an asset to pledge as collateral.
• You want lower interest rates and affordable EMIs.

Choose an Unsecured Loan if:

• You do not have collateral to pledge.
• You need quick funds for urgent expenses.
• You have a high credit score and can repay within a short tenure.

Before applying for any loan, evaluate your financial needs, repayment capacity, and creditworthiness. Always compare lenders, check interest rates, and read the terms and conditions carefully.