What is Meant by a Secured and Unsecured Loan?

Last Updated : June 8, 2020, 2:27 p.m.

When you borrow money, you’ll likely choose between a secured loan and unsecured loan. The difference between the two loans is security only. A secured loan is one that is connected to an asset, something like a car or home. With a secured loan, the collateral is possessed by the lender till the time the loan is repaid in full. If you default on your unsecured loan then the lender can’t take your property or collateral to recover the outstanding amount. Read this post and know the difference between the two and find which is better for your financial needs.

Which is the right loan for you?

There are a few factors that help in deciding whether to choose a secured or unsecured loan. A secured loan is generally easier to get, as there’s less risk associated with the loan amount. If your credit history is not good and you need to rebuild credit score , you should consider taking a secured loan. Because a secured loan will have a lower interest rate.

Both a secured and unsecured loan provides you the desired amount as per your financial requirements. For example, a home loan is best to buy a property as it comes with a lower rate of interest plus an extended repayment tenure. All this helps you pay off the loan easily. The loan amount will be contingent on the cost of the property. Home loans are financed upto 75%-90% of the property cost. Whereas, unsecured loans like personal loans are ideally suited for purposes like marriage, travel, education, medical emergency, etc. On an unsecured loan, the borrowing limit depends on your income and credit history.

Which Type of Loan to Pay First and Why?

If you have loans and you are having any kind of trouble paying them, it’s important you pay off a secured loan. For example, you may end up losing your vehicle or home that is mortgaged against the borrowed amount. But, the trouble can be more if your unsecured loan isn’t paid on time as it can put you in a massive debt trap, as the interest rates on an unsecured loan are very high. The penalty accumulating on your outstanding due will make it even tougher for you. When you find yourself in a situation like this then the smartest way to get out of it is by paying the loan that comes with a higher interest rate.