Understanding the Difference Between Secured and Unsecured Loans
By Team Shepays
2 days ago
There are junctures in a person’s life, where an amount is borrowed from the lenders with an agreement to repay it within a predetermined time period. This amount borrowed is termed as a loan. Loans are further categorised into secured and unsecured loans that have differentiated vitality and use as per an individual need.
Secured Loans- an analysis
Secured loans are secured against an asset. The lender withholds the title or deed of security until the borrower repays the entire amount. Asset like a property or a vehicle is generally used to get a loan.
On the other hand, asset classes like shares, fixed deposits (FDs), gold,investments, and others can be used as collateral while availing secured loans.
With the lender drawing a lien on the collateral asset, there is a possibility of repossession in case of default on the repayment. To recover the overdue amount, selling the said asset is one possibility.
Different kinds of secured loans
Secured loans cater to a variety of needs and are crafted to individualistic aims.
Home loans
Home Loans provide an umbrella security in constructing homes. With so many Indians, aiming towards a dream of constructing their own houses,home loans can just help in fulfilling that long cherished dream. Generally, sanction of upto 80% of the total value based on your income, current liabilities, and several other factors are taken in account by the lender. A top-up loan or home improvement finance can be taken in case of renovation of your existing abode.
Loan against property (LAP)
This type of loan helps in getting sanction between 60% and 80% of the property value, by the lender. Generally, a commercial, industrial, or residential property is pledged as a collateral to avail of the funds. There are no restrictions on use of this borrowed money. You may use it for meeting wedding expenses or taking a dream vacation or even expanding your business.
Loan against securities
Capitalising your investments and pledging these to meet personal or business requirements is possible with seeking loans against securities. Investments ranging from shares, Mutual Funds or even Fixed Deposits, can be set apart as collateral and a sanction value of 60 to 80% can be acquired in return.
Gold loans
Gold has been a prime and significant investment for people for decades. The organised gold market has been increasing its domain in the market. Gold jewellery, coins or gold biscuits can be set aside as a collateral to seek loan.
Lower rate of interest
Secured loans offer a lower rate of interest in comparison to unsecured ones. The risk for lenders is significantly reduced. It can also assist in reducing total cash outflow in favour of interest payment over the loan tenure.
Higher loan value
You can meet your funding requirements, based on the asset that has been collateralized, and can achieve almost 90% of the value for loan value.
Elasticity towards your needs
A flexibility in the form of deciding the tenure of repayment of the said loan along with the EMI as per your incomes is provided by the features like extensions and prepayment possibilities.
Unsecured loans-analysis
Unsecured loans are the kind of loans that do not have any collateral backing with a higher risk value. Lenders put up higher interest rates because there is no recourse to repayment in case of default of not making the payment in time.
In most of the cases, lenders pledge unsecured credit based on your repayment capability which are evaluated based on your current income and other important parameters like outstanding liabilities to determine the repayment ability.
Different kinds of unsecured loans
Stringent eligibility norms are needed to be taken up to avail the benefits of a loan.
Business loans
As per the name suggests, these loans are offered to businesses and can be used for a myriad of purposes like solving the working capital requirements, expansion, or other expenditures. Businesses may ask for a line of credit. It allows them to draw down the funds as needed.
Personal loans
Unsecured personal loans come with high interest rates. With a good credit score, you can obtain an affordable interest rate and thus, use the money without any limitation. It can be used for a myriad of occasions from wedding loans to education coverage for children and even medical reimbursements. It is of great benefit to pay for children’s education, medical treatments, home renovation expenses, or other emergency requirements.
Quick allocation of loans
Quick and easy allocation of loans saves you the time and can use that borrowed money for your assistance without hassles of complex and tiresome documentation.
No collateral needed
With no collateral pledged in the loan, your assets remain comparatively safe, provided you repay the amount as per agreed terms of the agreement.