Secured Loan or Unsecured Loan: Which One is Better?

December 14, 2024December 23, 2024

Why Choose a Secured Loan Over an Unsecured Loan?

Choosing between secured loans and unsecured loans can often be a challenging financial decision. While secured loans offer larger amounts with lower interest rates by using collateral, unsecured loans provide faster access to funds without the risk of losing an asset.

Whether you need funds for personal or business needs, understanding the key differences between these loan types helps you make an informed decision aligned with your financial goals. Read further and explore the key differences, types and benefits of the two loan types.

What is a Secured Loan?

A secured loan is backed by a collateral, usually a vehicle, car or personal savings. The funds can be used for larger expenses including business expansion, home or car purchase, or funding higher education overseas. Common types include mortgage loans, home equity loans and vehicle loans.

What is an Unsecured Loan?

An unsecured loan includes personal loans, unsecured business loans, student loans and credit cards. You can access funds through this collateral-free loan type by demonstrating strong creditworthiness. You can pay for education, meet medical bills or improve your home with these funds.

Differences Between Secured and Unsecured Loans

Check out the following tables to understand the key differences between a secured and unsecured loan:

Points of Distinction	Secured Loan	Unsecured Loan
Requirement for availing funds	Requires you to submit an asset or tangible item as collateral	Does not require you to keep any of your assets as collateral
Credit score requirements	Leniency in credit score due to the backing of collateral	You must have a higher credit score of 750 or above to qualify for favourable terms
Purpose of the loan	Often used for big-ticket expenses such as car or home purchases, or business expansion	Used for personal expenses which may include meeting emergencies, paying education fees, consolidating debts, or making small purchases
Rate of interest	A lower interest rate may be charged as the loan is secured by tangible security	Unsecured lending may attract a higher rate of interest
Consequences upon default	You may lose ownership of the asset kept as collateral, as the lender may seize it	Full ownership of one’s assets even after missing or delaying payments, however, lenders may charge additional penalties
Loan amount	Higher loan amounts	Granted loan amount is comparatively lower
Process of availing funds	Easier to avail funds as the financial institution has collateral	A stringent process as lenders need to believe that you are a reliable borrower
Repayment tenure	A flexible and longer secured loan tenure	Comparatively, a shorter repayment tenure as the credit risk is higher for lenders
Approval process	Requires more documentation and time due to the assessment of the collateral	Faster approval with less paperwork, focusing mainly on your income stability and credit score
Risk for borrower	You risk losing the offered collateral	Defaulting on payments can impact your credit score
Examples	Vehicle loans, mortgage loans, and home equity loans	Personal loans, credit cards and student loans

Types of Secured Loans

Following are the different types of secured loans that cater to different types of needs:

Mortgage Loan: It is taken to purchase or refinance a home, where you can offer the property itself as collateral. The lender may overtake the property if you default on the loan repayment.

Auto Loan: You can finance the purchase of a vehicle with an auto Loan. The vehicle acts as collateral, wherein the lender can seize the ownership of the vehicle upon payment defaults.

Home Equity Loan: You can take a loan against the home equity. The home itself is used as collateral, which can be foreclosed if you fail to repay.

Secured Business Loan: You can avail funds by offering business assets (such as real estate, inventory or equipment) or personal guarantees as collateral. You can use the funds to expand your business, fund business operations, purchase assets, etc.

Equipment Loan: Helps businesses purchase machinery or equipment by mortgaging the equipment as collateral. The lender can seize the collateral if the business defaults on the loan.

Secured Credit Card: A credit card which requires a cash deposit as collateral. The deposit acts as a collateral and credit limit. It is an ideal financial product for individuals with limited or no credit history.

Types of Unsecured Loans

The common types of unsecured loans are outlined below:

Personal Loan: You can secure funds without providing any collateral. This money can be used for general purposes such as paying for medical bills, consolidating debts, home improvements or covering emergency expenses.

Credit Card: A revolving line of credit that enables you to borrow up to a certain limit without providing collateral. You have to make minimum payments each month while paying interest on unpaid balances.

Unsecured Business Loan: It enables businesses to access funds without any collateral, but focusing more on cash flow, business revenue and credit history. Funds can be used for working capital, operational expenses or expansion.

Debt Consolidation Loan: This type of loan is used to consolidate multiple high-interest debts into a single loan with low interest rates. This loan type is unsecured and relies on your credit score for approval.

Student Loan: It helps students pay for education-related expenses, including tuition and registration fees. You are required to pay minimum monthly payments over a flexible tenure.

Benefits of Secured Loans

The advantages of seeking secured loans are listed below:

Access larger loan amounts at lower interest rates
Repay at your convenience through long and flexible terms
The EMI amount is spread over a longer tenure, resulting in lower EMI amounts
Avail tax benefits on interest payment and principal repayment

Benefits of Unsecured Loans

You may benefit from unsecured loans in the following ways:

Simplified application process with reduced paperwork
Faster approvals
No collateral requirements
No risk of loss of asset ownership
Flexible use of funds

Points to Note Before Taking Out a Loan

Before you take out a loan, whether secured or unsecured, the following are some points that you should keep in mind to avail favourable terms:

Clarify the purpose of seeking out the loan to avoid spending the funds on non-essential expenses
Access your financial health ensuring you can make loan repayments comfortably
Determine if you are comfortable using an asset as collateral or qualify for an unsecured loan effectively
Compare interest rates and repayment tenure across various financial institutions, ensuring you negotiate favourable terms
Check and improve your credit score to secure better terms

Conclusion

The choice of a secured loan or unsecured loan depends on factors such as your financial conditions, the purpose of the loan, your credit score, and your willingness to provide collateral. While there is no conclusive answer to which loan type is better, each caters to different financial needs.

If you are seeking lower interest rates and longer tenure, a secured loan is an ideal choice. Meanwhile, you can avail funds quickly through an unsecured loan based on a high credit score and stable income source. Explore various secured and secured loan options available at Kogta Finance and embark on your journey of business expansion.