Personal loan: what are the main differences between secured and unsecured loans? Details here

Whenever you are short of funds, it is recommended to take out a loan from a bank or financial institution. A loan is generally divided into two broad categories, namely secured and unsecured. A secured loan is given against collateral, i.e. an asset, whereas an unsecured loan is given without the security of an asset.

This is the main difference between the two types of loans. Another difference that sets the two loans apart is that a secured loan is given for loans such as home and car, while the unsecured loan is a personal loan given to meet a range of personal needs.

However, one should choose the type of loan based on the purpose for which the money is borrowed. For example, when you need a loan to go on vacation, you would not want to take out a secured loan and would opt for a personal loan instead.

On the other hand, when you want to raise funds to buy a car, you will have to opt for a secured loan. Let’s dig deeper and peel back some layers of two types of loans.

Main differences between two types of loans:

1. Interest rate: A secured loan has a lower interest rate while an unsecured loan has a higher interest rate.

2. Loan guarantee: A secured loan, by definition, needs collateral to back it, while an unsecured loan does not need collateral to back it up.

3. Purpose of the loan: A secured loan is usually given for a specific purpose, such as buying a car or a house, and these assets are guaranteed by the bank before the loan is disbursed to the applicant.

On the other hand, unsecured loans, in the form of personal loans, are not granted for any specific purpose. This could be to fulfill any personal need like organizing a wedding, buying a luxury item or going on vacation, among others.

4. Loan amount: Usually, the secured loan amount depends on the value of the asset held as collateral. Conversely, the unsecured loan amount generally depends on the earning potential of the applicant.

5. Documents: The documents required to get a loan include PAN card, Aadhaar, ID proof and salary slips. To obtain a guaranteed loan, you need, in addition to these documents, the ownership document for the asset that will be held as collateral.

In summary, if you want to raise funds to meet a financial need, you can take out a loan that may or may not be secured. If you have an asset to give as security for a specific loan, then you can opt for a secured loan. On the other hand, when you need money to meet many personal requirements, you can get an unsecured loan.