Secured Loan vs Unsecured Loans – Major Differences Explained – Loan Guides

Secured loan vs unsecured loans is a major doubt when it comes to taking loans from banks. If you are also from those who do not understand what is the difference between secured loans and unsecured loans, you’re on the right corner.

There are various types of loans, but all loans are categorized into two parts. The first one has Secured Loans, and the other is Unsecured Loans.

Let’s discuss them in detail:

What is a Loan?

The loan is the amount that is given to someone at some interest rate along with the promise that they will pay the amount back to the lender along with interest in the given time frame.

Secured Loan vs Unsecured Loans

Secured loans are loans that are protected by an asset. It could be anything like a car, house, farming field. The case is used as collateral, and the lender holds the deed until the loan is fully paid, including interest.

Unsecured loans are completely different from secured loans because in these cases, lenders take the risk to give the loans because there is no asset to recover in case of default.

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Secured Loans

Most of the loans are given in secured loans, and it is the most common way to borrow a large amount. However, the amount of the maximum loan depends on the asset’s value. Usually, the loan amount is somewhere 80% of the asset’s current value.

secured loans

Whenever you go to the bank for a loan, they always check your previous loan details and ask for anything worth the loan amount to make sure you will do all you can to repay the loan. If you fail to pay the loan, the lender can sell your collateral to pay off the loan.

Advantage of Secured Loans

  • Higher Loan Limit
  • Lower Interest Rates.
  • Longer time for Repayment

Example of Secured Loans

  • Auto Loan – It is also known as a vehicle/car loan that can be obtained through the dealer, bank, or credit union. They use your vehicle as collateral in case if you are not able to pay the loan on time.

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Unsecured Loan

Unsecured loans are different from secured loans. The best example of unsecured loans is credit cards. The lender takes the risk to give the loans because there is no asset to recover in case of default, or you cannot pay the loan on time due to this unsecured loan having higher interest rates and less repayment time than secured loans.

unsecured loans

However, banks don’t give unsecured loans to anybody without the proper research. They check for your financial resources and previous loan repayment details and provide some amount that you can repay the amount. You will be judged on the five characteristics of credit.

  • Character – It includes your credit score, employment, and references.
  • Capacity – It includes your income and current loans
  • Capital – It includes your savings or investment accounts
  • Collateral – It includes your personal assets offered as collateral, like a home or car
  • Conditions – The terms of the loan

If you score maximum in all of the above categories, the bank provides a direct loan amount in your account. Apart from credit cards, student loans and personal loans come in the unsecured loans categories.

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Examples of Unsecured Loans

  • Credit Cards – Credit cards are the best example of unsecured loans bank will issue credit card limits according to your financial behavior. Bank generates credit cards bill once a month and charges interest if you do not pay the balance in full.
  • Personal (Signature) Loans – These loans can be used for many purposes and vary from a thousand rupees to a million or more.
  • Student Loans – Student loans are used to pay for the college fee. These loans are not directly given to the lender. First, you have to provide proper college documentation, and then the bank directly pays the amount in the college/university.

The bottom line:

We hope this article helps you understand the difference between secured and unsecured loans. Still, if you have any doubts or questions, please ask in the comment section we would be glad to help you.

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