Is there a wedding in the house, or are you considering doing some home renovations? No matter the purpose, a personal loan can be a great way to fulfil your financial needs. However, there are two main classifications of loans: secured and unsecured. And to know the difference before applying for one is important.
In this blog, we share the difference between the two and help you decide which type of personal loan may give you a better advantage.
A secured personal loan requires you, as the borrower, to provide collateral—an asset like your car, home, or other valuables—as security. The lender can seize this collateral in case of payment defaults. Since the collateral mitigates the lender's risk, a secured personal loan often has a lower interest rate.
A secured loan may also allow for a higher loan amount based on your collateral and longer repayment terms. However, the loan application process for a secured personal loan can be more extensive and time-consuming than an unsecured loan.
Despite the fact that you have to provide collateral, getting favourable terms on this is relatively easy. These terms enable the borrower to qualify for a higher loan amount and increase their likelihood of loan approval by providing collateral.
Unlike a secured personal loan, an unsecured personal loan doesn’t require collateral. It is granted based solely on your creditworthiness and ability to repay. Because the lender is taking on more risk, an unsecured personal loan comes with a slightly higher interest rate than a secured one.
If you can build and maintain a good credit score, an unsecured loan can help you meet immediate or future financial requirements without any hassles. This is primarily because of good creditworthiness.
If you’re looking for an unsecured personal loan , Quid connects you with RBI-approved lenders. Our loan matchmaker ensures you find the right loan offer suitable for your needs.
Before choosing between a secured and unsecured personal loan, familiarise yourself with their key differences to determine which personal loan option suits you the best. Here is what you need to know before opting for any one of them:
The most apparent difference between a secured and unsecured personal loan is the requirement for collateral. A secured personal loan requires an asset as security, whereas an unsecured personal loan relies on your creditworthiness. This fundamental difference influences various aspects, including interest rates, loan amounts, and eligibility criteria.
While a secured personal loan generally offers a lower interest rate since the collateral reduces the lender's risk, an unsecured personal loan, on the contrary, may have an increased interest rate, but obtaining one is relatively easy. Borrowers with a good credit score may still secure competitive interest rates on an unsecured loan.
Personal loan lenders are often willing to approve a higher loan amount for a secured personal loan because the collateral provides additional assurance in case of payment defaults. On the contrary, an unsecured personal loan usually has lower borrowing limits since they reduce the lender's risk when granting a loan.
The qualification process for a secured personal loan can be more straightforward since the collateral serves as a backup for the lender. Conversely, an unsecured personal loan relies on your credit score, income, and loan repayment history. Thus, it is imperative to maintain a strong credit profile to qualify for favourable terms on an unsecured loan.
The nature of the risks varies. With a secured personal loan, the primary risk you face as a borrower is losing your collateral if you cannot repay the loan on time. On the other hand, an unsecured personal loan can hamper your credit score if you default on repayment. In both cases, planning your repayment in the capacity you can afford is critical before applying for one.
Selecting between a secured and unsecured personal loan depends on your needs, financial goals, preferences, and credit history. However, a secured personal loan might be better if you have valuable assets and seek a lower interest rate for a much higher loan amount.
On the other hand, if you prefer not to put your assets at risk and have a strong credit profile, an unsecured personal loan could be more suitable, especially for a lower loan amount. In any situation, it is crucial to plan your repayment and opt for a loan when you know you can pay in your capacity.
Understanding the critical differences between these two types of personal loans is essential for making the right decision. Each loan type offers distinct benefits and drawbacks, so aligning your choice with your financial needs, risk tolerance, and current financial situation is crucial.
Whether you value a lower interest rate or aim to safeguard your assets, giving these aspects extra thought will guide you toward the right loan.
Improving your credit score, receiving a stable income, and building a positive credit history can enhance your eligibility for an unsecured personal loan. Paying off existing debts and reducing your debt-to-income ratio can also make you a less risky borrower to lenders.
You can get a personal loan with low credit or limited credit history, though it may be more challenging. However, options for individuals in this situation are available, such as a secured personal loan or building your credit through alternative methods.
No, providing collateral does not guarantee loan approval. It’s just one of the many factors lenders consider. Other factors, such as credit score, income, and repayment history, also play a vital role. However, having collateral can increase your chances of getting approved for a secured personal loan.
A secured personal loan generally has a lower interest rate because the collateral reduces the lender's risk. If you default on the loan, the lender can seize the collateral to recover their losses. Thus, it serves as a backup for the lender to recoup his offered loan amount.
If you are having trouble making payments on your loan, it's essential to communicate with your lender immediately. Some financial institutions also offer loan deferment periods to help you manage your loan. So, openly communicate with your personal loan lender to plan and manage your payments effectively.
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