Secured vs. Unsecured Personal Loan: What You Need to Know

 

Whether you need a loan to cover an emergency expense or a planned one, like weddings, dream vacations, etc., personal loans can come to your rescue.

 

Though a personal loan is not the only option to fulfill your fund requirements, it is the most convenient one. With competitive interest rates and minimum personal loan eligibility requirements, personal loans are the most feasible option for meeting your needs.

 

The repayment period for a personal loan can go up to six years, and the amount can be repaid in equal monthly payments (EMIs); however, the term is flexible as long as it suits you. You can also calculate the EMI using the personal loan EMI calculator. 

 

Do you have trouble distinguishing between secured and unsecured personal loans when you’re looking for one? 

 

There is no need to worry. This article highlights the critical differences between secured and unsecured personal loans. 

 

What is a secured loan?

 

A secured personal loan is one that allows you to obtain financing using a piece of an asset as collateral. If you do not repay the debt, the loan provider can seize your collateralized asset and recoup the outstanding loan amount. The lender, however, will likely charge a lower personal loan interest rate because it is at a lower risk with a secured loan.

 

What is an unsecured loan?

 

Personal loans are usually unsecured in nature. With an unsecured loan, there is no secured asset needed for you to be approved. Obtaining an unsecured personal loan may require you to meet higher personal loan eligibility requirements like a high credit score or even higher personal loan interest rates.

Secured personal loans vs. Unsecured personal loans

 

The likelihood of approval, fees, interest rates, and collateral required to get either an unsecured or secured loan can vary. Prior to applying for a personal loan, you must be aware of a few key differences.

 

Secured Personal Loan	Unsecured Personal Loan
Collateral
Secured loans need you to put up an asset as collateral with the lender, giving them the power to take the asset if you default on the loan.	Unsecured loans do not require collateral, but defaulting on the loan leaves your credit vulnerable and liable to other consequences.
Interest Rates
Secured loans are more likely to be repaid; thus, the lenders are less worried about taking on a risk. Due to this, personal loan interest rates tend to be much lower.	In case of default, the lender is not guaranteed any amount from an unsecured loan. As a result, these personal loans are often associated with higher interest rates.
Borrowing Limits
A secured loan typically has a higher borrowing limit due to the financial requirements of obtaining a loan.	The borrowing limit of an unsecured loan is lower since it does not need to meet extensive financial requirements.
Personal Loan Eligibility Requirements
The eligibility requirements may be lower in the case of secured personal loans since the borrower takes on additional risk even though you have a poor credit score.	A poor credit score can cause a loan application to be rejected or lead to extensive eligibility criteria as lenders perceive it as a risky stance.

 

Which one to opt for?

Your choice of personal loan will depend on how much money you need, your past credit record, and your credit rating. A secured loan may be the ideal choice if you are sure you won’t default on any payments that might result in losing your collateral. 

 

Nonetheless, unsecured loans are a good option if you do not want to expose your assets to risk. If your credit score is high, you may get a loan at more competitive personal loan interest rates.

 

In summary

It is possible to get the money you need with secured and unsecured personal loans. Both have their own benefits and drawbacks. You should shop around for a personal loan and compare interest rates and fees to make sure you’re getting the most competitive rates. You could also determine the EMI using the EMI calculator on the lender’s website to check for the lowest EMI.