Secured v/s unsecured loans: Differences to note
What's the story
In India, personal loans are a common means of financing, but they can be confusing. Secured and unsecured loans are two types of personal loans that differ in terms of collateral, risk, and interest rates. Understanding these differences can help you make informed financial decisions. Here's a look at the key differences between secured and unsecured personal loans in India.
#1
Understanding secured personal loans
Secured personal loans are backed by collateral, such as property or fixed deposits. Because the lender has an asset to fall back on, these loans usually come with lower interest rates than unsecured ones. The loan amount is usually higher and can be repaid over a longer period. However, if the borrower defaults, the lender can seize the collateral.
#2
Exploring unsecured personal loans
Unsecured personal loans don't require any collateral. They are granted based on creditworthiness and income level. Since there is no asset backing the loan, the interest rates are higher than those for secured loans. The amounts sanctioned are usually lower, and the repayment period is shorter. However, these loans can be a good option for those who don't have assets to pledge.
#3
Interest rates comparison
Interest rates on secured personal loans are generally between 8% and 15% per annum in India, depending on the lender and borrower's credit profile. Unsecured loans, on the other hand, can have interest rates ranging from 12% to 25% per annum due to the higher risk involved for lenders.
#4
Loan amounts and tenure differences
Secured personal loans typically allow for larger amounts, sometimes up to ₹1 crore or more, depending on the collateral's value. They also offer longer tenures, often up to 20 years or more. Unsecured loans, however, usually cap at ₹25 lakh to ₹50 lakh with tenures ranging from one to five years.
Tip 5
Eligibility criteria insights
Eligibility for secured loans mainly depends on the value of collateral offered, while unsecured loans focus on credit score and income verification. A good credit score (above 750) is vital for availing unsecured loans at competitive rates. For secured loans, maintaining regular payments is essential to protect pledged assets from repossession risks.