Key Differences between Secured and Unsecured Loans

Taking a loan is one of the easiest ways to meet financial emergencies or make hefty purchases like a house, car, studying abroad, health expenses, etc. Whether it is a short-term or a long-term financial need, a loan is the perfect solution if you are short of funds. But, when you buy and sell forex or apply for a loan you need to choose a credible lender or company. There are two kinds of loans to choose from — secured and unsecured. This article talks about the key differences between both types of loans and make it easier for you to choose which one is best for you.

Collateral

A secured loan is always given against collateral. That can mean any valuable asset like an automobile, home, jewellery, land etc. When applying for a secured loan, the borrower pledges the asset to the lender. In case the borrower is unable to repay the loan, the lender can always get his money back by selling off the asset.

No collateral is involved in unsecured loans. Here, the borrower does not have to pledge any asset while applying for a loan. Examples of unsecured loans are credit cards, personal loans and student loans.

Interest Rate

Since secured loans are given against an asset, the interest rate is low. On the other hand, as no asset is involved in unsecured loans, lenders usually charge a very high rate of interest.

Borrowing Limit

As secured loans are always backed by an asset or collateral, the borrowing limit is quite high. Meanwhile the borrowing limit is low for unsecured loans. With no assets to back the loan, lenders cannot afford a higher borrowing limit as there is no collateral they can seize in case the borrower defaults on payments.

Risk Factor

With unsecured loans, lenders have much lower risk. In the event of a payment default they can cover the amount by seizing the asset. With unsecured loans the lenders are at a much greater risk due to lack of collateral. However that does not mean that the lender cannot take action. If the borrower defaults on a payment taken on an unsecured loan, the lender can always approach the court and file a case against the borrower.

Both types of loans come with advantages and disadvantages. Which kind of loan is suitable for you depends upon your requirements. That’s why before you apply for a loan it is imperative that you list out your priorities. Further, for complete peace of mind, apply for a loan only from one of the best gold loan companies.

Unimoni Financial Services Limited

Written by

Unimoni, a global financial player, seamlessly handles a remittance volume of nearly USD 30 billion annually. https://www.unimoni.in/

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