Understanding Secured Loans and Unsecured Loans

January 30 , 2013

What are secured loans?

Secured loans are the loans on which the bank or lender requires you to provide some assets as security or collateral against your borrowing. If you default on repayment the lender can take possession and sell the pledged asset to recover whatever is unpaid. The lender may not require physical possession of the asset; just the documents might do in most cases. Home loan, car loan, gold loan, loan against property and loan against shares are all examples of secured loan.

What are unsecured loans?

Unsecured loans are those which are not secured by pledging of any sort of asset. Typical examples are personal loan and credit card debt.

Secured loan vs unsecured loan

Interest rate on secured loans is much lower than on unsecured loans. In secured loan the lender has assurance that hid dues can be recovered. Hence secured loans are less risky loans for banks and other lenders.

Term of secured loans can be higher than of unsecured loans. Secured loans tend to be long termish compared to unsecured loans which have maximum tenure of a few months to 5 years.

Maximum borrowing limit of unsecured loans is also lower than of secured loans.

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