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Unsecured vs. Secured Loans: What’s the Difference and Which One to Choose?
Posted on Friday, May 5th, 2023 | By IndusInd Bank
An unsecured loan is a collateral-free loan and a secured loan is backed by collateral. Each has its set of pros and cons. You should choose the loan type that best suits your needs and situation.
While steering clear of debt is an ideal many people strive for, the truth remains that most of us still depend on credit to pay for life’s big-ticket expenses. So, be it a house, a car, a home renovation, or a business, a loan often plays the role of a financial saviour, allowing you to pay back in accordance with your comfort and convenience.
When considering loan options, it is important to know the difference between a secured and unsecured loan so as to figure out the better of the two options for your needs and situation. Read on to get the complete lowdown on the two categories of loans and which one you should opt for.
The Difference between Unsecured vs. Secured Loans
Secured Loan: A secured loan is a loan a bank or financial institution sanctions in exchange for collateral i.e. your property, gold, a car or vehicle, a fixed deposit, or any other valuable asset you own. A secured loan necessarily implies that if you don’t pay back your loan, the bank has the right to seize your collateral as payment. Assets that can be put up as collateral for a secured loan are as follows:
- Property or Land (Loan against Property)
- Gold (Gold Loan)
- Vehicles i.e. cars or trucks (Loan against car)
- Bank accounts i.e. fixed deposits, money market accounts (Loan against fixed deposit)
- Stocks and mutual funds and insurance policies such as life insurance (Loan against securities)
Unsecured Loan: An unsecured loan is not secured by any collateral. Since this loan type is relatively riskier for the lender, it typically comes – though not always – with a higher interest rate. An unsecured loan is usually sanctioned after the lender has reviewed your financial situation and ability to repay the amount. Finding out about your credit score and history of repaying debts are part of this evaluation process. Examples of unsecured loans are as follows:
- Personal Loan
- Credit card
- Student loan
Pros and Cons of Unsecured and Secured Loans
| Secured Loans | |
| Pros | Cons |
| Available at a lower rate of interest | Risk of losing an asset |
| Availability of higher loan amount | Lengthy and slightly tedious application process because multiple checks are required |
| Longer repayment tenures | Longer loan repayment tenure could result in paying more interest over time |
| Can be obtained even with a low credit score |
| Unsecured Loans | |
| Pros | Cons |
| Easy application process and swift disbursal | Could have a higher rate of interest |
| Can be used to fulfil a variety of purposes | Loan amount may be smaller |
| Convenient loan terms including flexible repayment tenures | Eligibility criteria may be stringent |
| No risk of losing any valuable assets | Needs a higher credit score |
Which Type of Loan should you Choose and Why?
Whether you choose an unsecured loan or a secured loan depends entirely on your specific needs and situation. But generally speaking, it is recommended that long-term borrowers or those in need of a large amount of money should opt for a secured loan. A secured loan is appropriate for big expenses such as property purchase.
On the other hand, borrowers who are looking to fulfil short-term expenses – such as medical bills or home repairs – should opt for an unsecured loan such as a personal loan. Moreover, if you do not have or wish to put up any assets as security, you will have no choice but to take out an unsecured loan.
Irrespective of the loan type you opt for though, it is important to bear in mind that you should only borrow what you need and can afford to pay back with ease.
IndusInd Bank – Your Best Banking Partner
IndusInd Bank offers a variety of secured and unsecured loans such as loan against property and gold loan as well as collateral-free personal loans respectively.
Marked by attractive interest rates and flexible repayment tenures ranging from 1-4 years, our personal loans may be used to fulfil an array of personal needs. Best of all, the application process is 100% paperless, entailing just 4 easy steps including video-KYC. Apply for a loan at IndusInd Bank today!
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
