Often might wonder which is better – whether to apply for a secured loan or unsecured loan. The secured loan is where you need to pledge some sort of collateral. You may pledge your gold, your commercial property, your house or your vehicle with the lenders to avail the secured loan. Gold loans, car loans, mortgage loans, home loans are all examples of secured loans. While personal loans, consumer loan, education loan or credit card can be categorized under unsecured loans. They are given out from one’s creditworthiness and do not require you to offer any asset as security to your lender. Here, in a nutshell, are the critical differences between these two types of loan:
Characteristic of an unsecured loan:
Collateral: For an unsecured personal loan, you do not have to provideany type of collateral. Most common example of an unsecured loan is personal loan. It’s a multi-purpose loan where you aren’t required to provide any asset as security. Before approving the loan application, banks or NBFCs check your credit worthiness by looking at your professional and personal details, banking history, your financial health and your past credit history.
End Use: You may use the loan amount for any purpose – be it for buying home improvements or furniture, for a perfect holiday, to fund your children’s education, for your child’s marriage, purchase of consumer durables, as working capital for your business, for a medical emergency, or another emergency.
Eligibility: Applicant needs to be salaried or self-employed with a good net income, should fall in the age bracket of 21-57 years and should not be a willful defaulter with healthy credit history.
Process: Unsecured loans can take less time as there is less documentation involved. Some platforms even offer instant loans, subject to approval criteria laid down by them.
Interest rate: A personal loan or say the unsecured loan is one of the costliest loans in the market. Its interest rate could go up to 30% per annum or even more, depending on your credit situation. Similarly, interest rates on credit card outstanding can be extremely high.
Loan amount: Online Personal loan amount could range from a thousand rupees to tens of lakhs depending on several criteria such as your income, credit history, employment or business profile, lender’s lending policies, etc.
Tenure:It‘s a short-term loan with flexible repayment period that can range between 1-5 years.
Both secured and unsecured loans have advantages and disadvantages. You need to conclude for what purpose you need the loan and choose accordingly.
Credit card Loan
Credit cards are unsecured loans. We do not know it when we start to use it, but credit cards are a type of unsecured loans.
While issuing a credit card, Credit Company set a limit for usage. And they also give the time limit to pay off amount.
If you default or do not pay off within the time limit, the interest rate and the whole amount due get increased day by day.
An educational loan
Let’s say that you do a job for a few years after graduation. Now you feel to go ahead and hold MBA degree. You’ve some savings to study at top-notch MBA institute, but it is not enough. So you go to the bank and talk about an education loan. They tell, to a certain extent, the bank will offer you a loan which does not need collateral. And after computing, you find out you can take an unsecured loan from bank and rest of amount you can pay from savings. This is how unsecured loans work.