In today's post, we are going to talk about Secured Loans and Unsecured Loans. You must be aware that the interest rate of a secured loan is slightly less. And the interest rate of unsecured loans is high. But why do banks charge you higher interest rates on unsecured loans? Both the loans are associated with some risks. What are the advantages and disadvantages of both? In this post, we will know all these differences in detail. So that when you go to get a loan you can make a fair decision. And you know well whether you should take a secured loan and unsecured loan.
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| Secured Loans Vs Unsecured Loans |
So first, let's understand what unsecured loans and secured loans are. If we talk about secured loans, then the secured loan is backed from the assets. This means the security of something is given. Something is mortgaged. When a secured loan is given there is no collateral in case of an unsecured loan. There is no security of any kind. That's why it is called an unsecured loan. For example, in a home loan, you mortgage a house or any property under loan against property. In a car loan, you have to mortgage the car. In a gold loan, you mortgage the gold. You also get a business loan against machinery or with any inventory of your business, any kinds of goods, or your maintained raw materials. Against that, you get the loan. If the loan defaults in the secured loan, the bank can recover the loan by selling your assets. That's why it is called a secured loan. If we talk about unsecured loans and see examples. So a personal loan is an unsecured loan. The education loan is also unsecured. Credit card debt is also an unsecured loan. If you take a bank overdraft, then that too is a type of unsecured loan. In business also you can get an unsecured loan for working capital management. So why do banks charge you higher interest rates for unsecured loans? Let's understand it: The risk of default is less in the case of secured loans. You do not want your asset to be auctioned or to be sold. Because you get a loan less than the value of your asset.
For example, you have taken a home loan of ₹80,00,000. So your property value will be ₹1 Crore. So you would not want to lose your property worth rupees one crore. That's why maximum people make full payment of the secured loan. Secured loan default cases are very rare. Unsecured loans have high default cases. So the risk of the bank increases. So it is simple if the risk will increase. higher the risk, higher the interest rate. If there are more defaults then the bank will think to divide the default amount between the customers of that profile. So for this reason the bank increases the interest rate. If the risk is low, the interest rate will also be low. That's why the secured loan interest rate is always low. And the interest rate of unsecured loans is very high. For example, suppose you take a home loan of 8%. So you will get a loan against property up to 9% to 9.5%. But on the other hand, if we talk about personal loans, you will get it from 13% to 14%. There is a huge difference if we talk about unsecured loans. Similarly, credit card debt is too much. It could be 20%. One year's charges range from 20% to 30%. Because they charge 2 to 2.5% every month. If you have any default so we discussed risk and interest rate. Suppose you default on the loan, so what will happen in that case. The bank will recover its dues(Loan + interest rate). All the outstanding loans till that time. Plus due interest rate of the bank till the time. The bank will recover all the dues till that time by selling your asset. In the case of the unsecured loan, if the loan defaults, the bank does not have any such item by selling which it can recover the amount. So the bank has to write off this kind of loan under compulsion.
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But what is the risk to you as a borrower? If you default on the loan, you are also at risk. Your credit score goes down if you default on any loan. Whether you default on any payment of a credit card. You default the education loan or personal loan. If you default on any kind of loan, then your credit score becomes very bad. In India, we know it as Cibil Score. CIBIL score is a very popular score. It is out of 900. A 750+ score is considered a good score. If you default on any loan, your score can fall below 700 or even 600. It may take a long time to increase the CIBIL score. You have to pay the loan you have taken. So it's better that you do not default on any loan. Because in future you may need a loan. If your credit score is bad then you will never get the loan. You also won't get credit cards easily. Now let's discuss its process and documents. The processing time of a secured loan is a bit consuming. This requires more documentation. A complete profile study of the customer is done. And its risk profile study is done. That's why approval takes a little longer. But the unsecured loan is very fast and instant. It does not require much paperwork. Suppose you already have a credit card. So on that basis, you can get a personal loan and credit card loan very easily. It depends on your CIBIL score. If you have a good credit history. So you can get a personal loan, an education loan, or credit card debt very easily.
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Now it comes to which cases you should take a secured loan? So firstly if you want to take out a loan for the long term. Let's say if you are buying a house you should take a home loan. If you want to take a loan for your business then Loan Against Property is a good option. If you do not get a home loan then a home loan is the best loan if you want to buy a house. Because a home loan is the cheapest you should always take a home loan in that case. And you should take a secured loan in a higher amount also. The simple reason is that your interest rate is low. If you want to take a bigger amount so you don't want to pay high-interest rates. If you want to take out a large amount loan for a long time. So in that case you should take a secured loan. You can prefer an unsecured loan for the short term. You should not prefer this, you should take this loan in emergency only. If you have the option that you can take a secured loan. So always take a secured loan whether it is short-term or long-term. Because if you get instant approval, in that case, you can take an unsecured loan. Take an unsecured loan for a small amount because you don't want to pay a high-interest rate. So in an emergency or for a short term. And if you want to take a loan of a lesser amount, then you can take an unsecured loan. Apart from this, a top-up loan is also a good option. Suppose you have taken a home loan so after that also you can take a top-up loan. And you can use it for any purpose. In this post, I have covered all major points related to secured loans and unsecured loans. So I think if you want to take any decision in future whether you have to take a secured loan or an unsecured loan. So I think this post will be helpful for you.
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