Personal Loan: Difference Between Secured and Unsecured Loans

Unsecured loans including personal loan and credit card outstanding have seen healthy growth in India in recent years. Successful use of data analytics, increased reach, and the ability to rope in more borrowers with low or no credit scores have allowed financial institutions to disburse more unsecured loans.

If we compare secured vs unsecured loan growth in the country, then unsecured loans are clearly the winner. According to leading credit information agency, TransUnion CIBIL, credit card outstanding grew by 40% in the third quarter of FY 2019-20 and personal loan disbursal grew at 28% over the same period.

According to a recent report published by ICICI Bank and CRISIL, unsecured loans including personal loans, consumer durable loans and credit card consumption will likely double to Rs. 96 lakh crore in the next five years.

In today’s fast-paced life, unsecured credit such as an instant personal loan is highly popular. For instance, Bajaj Finserv personal loans available on Finserv MARKETS come with an online loan processing and approval process that requires minimal documentation. Loan applicants can enjoy quick approval within 3 minutes, swift loan disbursal and flexible tenures of 12-60 months.

What is a personal loan?

A personal loan is an amount of money that you can borrow from an authorised lender to meet your immediate financial requirements. You can take a personal loan for home renovation and repair, wedding, holiday or to meet emergency hospitalisation costs, etc.

A personal loan is an unsecured loan, which means you are not pledging anything as security to get the loan. It is also known as a collateral-free loan.

Apart from unsecured loans such as personal loan, consumer durable loan or credit card usage, we also need to have some understanding on secured loans. Below we will try to understand the difference between secured and unsecured loans.

What are secured loans?

A secured loan is one where you have to pledge collateral as security to obtain the loan. For example, a home loan, car loan, gold loan or loan against property are secured loans as you need to pledge a collateral to get this loan.

What are unsecured loans?

As mentioned earlier, unsecured loans are those that don’t require you to maintain an asset as security or collateral to avail a loan. In an unsecured loan, the risk of the loan is borne by the financial institution and is granted based on your credit score and history, income, job stability and other factors.

Examples of unsecured loans include personal loan, travel loan, business loan, marriage loan, credit cards, etc.

Personal loan

Basically, a personal loan is taken for meeting personal financial requirements such as home repair, revonation, wedding, holiday, medical contingency, or even to meet a shortfall of funds in buying a car, home, jewellery, etc. Personal loan interest rates in India range between 10.5-15%.

Business loan

Unsecured business loans allows businesses to procure funding for working capital, to expand their business, to buy new equipment or for other purposes without pledging any asset as collateral. Unsecured business loan interest rates in India range from 11.2-22%.

Difference between secured loan and unsecured loan

Collateral

Secured loans are low-risk activity for lenders as they can recover unpaid dues in case of loan defaults from the pledged asset or collateral. That is the primary reason why these types of credit are called secured loans.

On the other hand, while unsecured loans are low-risk for the borrower, it entails a higher risk for lenders if it turns out to be a bad loan.

Usage

Generally, in case of a secured loan, usage of the loan money is restricted to the nature and purpose of the loan. For example – a home loan can only be used for purchase of a home; a car loan for buying a car. However, in case of gold loans and loan against property, one has the flexibility to use the loan money for any purpose.

In case of a personal loan there are no restrictions on how you want to use the money. You can spend the money on renovation, furniture, shopping, holiday or any other emergency purpose.

Loan value and tenure

When we are choosing between secured loan vs unsecured loan to meet our funding needs, we also have to keep the loan value in mind. With secured loans you can obtain a higher amount of loan as you are pledging an asset as collateral against the loan. Also, with secured loans you can take the loan for a longer tenure.

An unsecured loan such as a personal loan is available up to the tenure of 5 years while secured loans such as a home loan can last for 20-25 years.

Credit score

Your CIBIL score, income, repayment history and other factors plays an important role when you apply for an unsecured loan. But in the case of secured loans where you pledge collateral, lenders don’t give much weightage to credit score, income and other factors.

Interest rates

Generally, interest rates are lower for secured loans compared to unsecured loans. Lenders charge lower interest rates on secured loans because a collateral is pledged in order to avail the loan.

Once you have understood the difference between secured and unsecured loans, you are the best person to understand which type of loan suits you best based on your requirements. Whether it’s an unsecured or secured loan, with smart lenders you can get approval within minutes and disbursal within 24 hours.

An instant personal loan not only helps you meet your immediate financial requirement with minimum documentation and formalities, but it also helps you build and improve your credit score and history. With attractive interest rates and flexible repayment options, now is the best time to take benefits of a personal loan.

Today, you can also obtain an unsecured business loan to build new infrastructure, upgrade machinery and expand your business. You can avail a Bajaj Finserv Business Loan on Finserv MARKETS up to Rs. 30 lakh and get approval under 3 minutes. You can also apply for SME/MSME business loans on Finserv MARKETS.

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