Difference between Secured Loans and Unsecured Loans

Difference between Secured Loans and Unsecured Loans

When an individual is in need of money, there are many choices for getting the money required, such as loan from relatives, advance cash on credit card or loan from bank. Nowadays, loans are taken as the finest method for getting finance for any reason such as development of a house, education, buying a car or some other business necessity. By and large, two sorts of loans are there i.e. secured loans and unsecured loans. The former means pledging an asset against loan. Whereas the latter means there is no need to pledge an asset against loan. Many individuals experience difficulty in understanding which of the loan is better. In this article we have gathered all the fundamental contrasts between these two sorts of loans.

Secured Loans

Secured loan is a sort of loan in where borrower pledges any asset as a security against the taken loan. In this way loan is secured against collateral. If there should be an occurrence of default in reimbursement the lender has the privilege to seize or sell the asset keeping in mind the end goal to recover the loan. In this case, borrower does not transfer his asset to the lender; asset is only pledged by the lender. In secured loans the risk is very low due to this the interest rate is very low.

Unsecured Loans     

Unsecured loans are the loan in which the credit sum is not secured by pledging an asset. This kind  of loan is called as unsecured because in this case no guarantee is given related to repayment of money .if borrower becomes default, lender can’t get the money forcefully or selling an asset of borrower but lender can sue the borrower to get money. The level of risk is very high so this leads to increase in the interest rates. In this kind, loan is given on the basis of financial status, creditworthiness and relationship with bank.

Secured Loans VS Unsecured Loans

• Meaning:

Secured loans means the loan becomes secured through some asset.

Unsecured loans means the loan in which asset is not given for security.

• Depend:

Secured loan is given on the basis of collateral. Collateral means bank have taken the possession of assets that includes car, house etc.

Unsecured loans are not given on the basis of collateral; bank does not need to get possession of assets as in this bank only look on creditworthiness of borrower.

• Pledge:

In secured loans, there exists the pledging of assets.

In unsecured loans, no pledging is there.

• Risk:

In secured loans, assets are pledged so that’s why level of risk is very low.

In unsecured loans, more risk is there as compare to in secured loans.

• Interest rate:

In secured loans, low risk is there that’s why level of interest rate is also low.

In unsecured loans, risk is very high so the interest rate is also very high as compare to secured loans. Sometimes, in unsecured loans interest rate are very high that it becomes more than the credit card of borrower.

• Time period:

In secured loans, the time period of loan is long as some times it s given for 30 years because of low risk.

In unsecured loans, loan is given for short time period because of high risk so bank wants the money back as early as possible.

• Limit:

In secured loans, borrowing limit is more as compare to unsecured loans.

In unsecured loans, borrowing limit is low.

• Availability:

In secured loan, the person have good credit will get loan and in this case relationship with any financial institution is not needed.

In unsecured loans, everyone will not get the loan as banks needed that borrower must have best credit score and also have excellent relationship with financial institution.

• Default:

In secured loans, when borrower becomes default then bank can take or sell the asset to recover their money.

In unsecured loans, when borrower becomes default, the bank can sue borrower to recover their money.

Conclusion

From above article we come to know that secured loans are secured by pledging an asset called as collateral while unsecured loans are not secured and no pledging or collateral is there. In secured loans, level of risk and interest is low whereas it is high in case of unsecured loans. Secured loan is given for more time period and has more limit as compare to unsecured loans. In secured loan, the person have good credit will get the loan and relationship with any financial institution is not needed while relationship is needed in unsecured loans. When borrower becomes default then in case of secured loans lender can seize or sell the pledged property but in case of unsecured loans, lender can only sue the borrower.