Secured vs. Unsecured Personal Loans: Which one should you choose? | Mint

Are you planning to apply for a personal loan but are confused whether to go for a secured loan or an unsecured loan? Many banks and Non Banking Financial Companies (NBFCs) provide personal loans which may or may not require collateral.

However, before you choose one, it is important that you first completely understand your requirement and whether or not you really need a personal loan so that you avoid a financial obligation which you are not ready for. Let’s understand what are secured and unsecured personal loans and which is the best option for you to choose.

What are unsecured personal loans?

Unsecured personal loans are loans which are offered to you based on your CIBIL score and other eligibility criteria set by the lender including your financial capability, employment and age. These types of personal loans do not require you to keep your assets as collateral.

However, this also attracts higher interest rates because of the increased risk incurred by the lender in providing the personal loan. Your credit score and income stability plays an important role in making you eligible for the loan. This loan is a great option if you are someone who does not have tangible assets to provide as collateral but require a personal loan for an emergency or a major event.

What are secured personal loans?

Secured personal loans are the type of loans offered by lenders with comparatively higher amounts and a flexible repayment tenure. Lenders require collateral for issuing these types of personal loans. Although credit scores and your income play an important role for determining your eligibility, lenders accept high value assets like car, house, land etc for granting you the loan.

Hence, these loans have a lower interest rate as compared to unsecured personal loans as the risk is comparatively less for the lender with the collateral. If you are someone who has assets to provide as collateral and are capable of repaying the loan on time, then a secured personal loan can be a great option for you.

Secured vs. unsecured personal loan

Secured and unsecured personal loans have their own advantages and disadvantages. Before you decide on getting a personal loan, it is essential that you evaluate your demand and your financial condition. This is because of the fact that personal loans have a higher interest rate as compared to other types of loans provided in the market.

So, according to your need, you can then decide which type of loan you really require. The loan disbursement is much quicker in the case of unsecured personal loans as the verification process is easier and time efficient as compared to secured loans. If you are in urgent need of funds, then unsecured loans can be a better option for you.

Although secured personal loans have lower interest rates, you must realise and be prepared for worst case scenarios. If in case you are unable to repay the loan, you may lose your asset which you guaranteed as collateral. Therefore, it is advisable to understand your risk taking capabilities before you actually proceed with the loan application process. Secured personal loans have a longer repayment period. If you have planned your debt repayment, then a secured personal loan can be a better option for you.

Another aspect is your credit score which you should consider while choosing between a secured and unsecured personal loan. If you have a low credit score, your chances of getting an unsecured personal loan are difficult because of the fact that it does not require collateral. In this scenario, getting a secured personal loan is a better option and also a chance for you to improve your credit score for future loans.

The amounts offered in unsecured personal loans are much lower than that of secured personal loans. If you are in need of a larger amount of funds, then secured personal loans are the option you should consider.

Conclusion

Personal loans have higher interest rates as compared to other loans available in the market. If you get eligible for higher amounts, you may get attracted to take more than what you actually require. It is advisable that you stick to your requirements and do not end up taking on more debt than you can afford.

In both secured and unsecured personal loans, if you fail to repay the loan on time, then you are prone to get into penalties and end up in a debt trap. It is important to choose your plan wisely and consider all the pros and cons of both the personal loans before you decide on choosing one for yourself.