If you are looking for a personal loan, you must have noticed that there are two types of personal loans- Secured and Unsecured. Let’s take a look at the prime differences between these two options and the factors based on which one can decide which one to go for.
The fundamental difference is what stands behind these loans. A secured loan is backed by a collateral. In this case you agree to give an asset that acts as a guarantee for the loan. It serves as a security for the lender and protects him from losses. In case you do not make the repayments, your asset is claimed and sold off to recover the debt amount you owed to the bank. Therefore before going with this option one must be sure of one’s ability to make the repayments.
Unsecured loans do not have any collateral. Hence you do not stand a risk of losing any of your asset even in case you default. The only assurance that the lender has that you will repay your debt is your word and your history of past credit behavior. Hence lenders carefully evaluate your personal information like income, current debts, CIBIL Score and report to assess the level of risk involved in lending you money.
Even though the borrower risks losing his asset, he may still go with a secured loan under following circumstances.
When you need a higher Loan Amount
The amount of loan that you can get sanctioned is usually higher in case of secured loans. Since unsecured loans are riskier for the lenders they do not approve very huge amounts.
When you have a low CIBIL Score
In order to qualify for an unsecured loan, one generally needs a high CIBIL score. A good credit standing helps in winning the trust of the lenders. But if your CIBIL score isn’t high enough to get easy approval for unsecured loan, you may apply for a secured loan. Since the risk of the lenders is lower in this case, they do not have strict rules of having a minimum score. Hence they are easier to qualify for.
When interest cost difference is substantial
Secured personal loan interest rates are usually lower than the unsecured ones. One gets better terms and conditions and a longer duration for repayments. A longer term means that the monthly repayments will be smaller. Hence, if you have an asset to put as a collateral and you are sure of your ability to repay the debt, it is a wise decision to opt for a secured loan to save on interest costs.
However, processing of a secured loan may take a little longer. The lender may want to get the collateral valued to make sure that it is enough to cover the borrowed amount. The processing fees and other charges would be higher too. An unsecured loan becomes a better choice under following circumstances
- When one needs to borrow a small amount of money for a short period of time
- When one has a stellar credit profile and an excellent CIBIL score that helps one to qualify for the best personal loan interest rates.
- When you do not have any collateral to back your loan, or you do not want to put your assets at risk.
Defaulting on loans
Defaulting on secured as well as unsecured loans will affect your credit report and CIBIL score negatively. If you default on payments of a secured loan, the lender can legally take possession of the asset. The proceeds of the sale will be used to settle the debt. In case of unsecured loans, the bank cannot claim your property. But it can put your account into collections and take legal action to recover its debt. Late payments, Missed payments and account that go on collections will severely tarnish your credit profile. When potential lenders check your credit history, such remarks will deter them from lending you money.
Check your CIBIL score today, and find out whether you can qualify for the best loan interest rates. This will help you start your decision making process.