Secured loan vs unsecured loan - how to choose the right one

Apr 07, 2020

There are a variety of loans that banks and NBFCs offer these days. The two main categories, however, are secured and unsecured loans. If you’re someone who is keen on applying for a loan but don’t know the difference between secured loan and unsecured loan, then this article which covers the benefits and drawbacks of secured loan vs unsecured loan will give you a fair idea of which of two is the best for you.

Secured Loans

A secured loan is a category of loan that requires borrowers to pledge their assets or some form of security in order to obtain the loan. Loans against property and gold are the most commonly availed secured loans that require borrowers to offer their assets as collateral. The best way for a borrower to obtain a high loan amount in exchange for their pledged assets is to get a secured loan. Non-recourse loans are a subcategory of secured loans that offer borrowers significant protection. Under the provisions of such a loan, a lender cannot claim more than the pledged asset of a borrower in the event they default on payments.

Unsecured Loans

Loans that do not require collateral from the borrower are termed as unsecured loans. In cases where borrowers default on payments for their unsecured loans, lenders have no way of recovering the loan amount, as borrowers have not pledged any assets to seize. Lenders also cannot claim seizure of any assets that the borrowers might have in their name. This makes it difficult for borrowers without assets to obtain unsecured loans, since the risks that giving out such loans pose for lenders are considerably high. This is why unsecured loans require the borrower to furnish a CIBIL score within a good range, usually expected to be 650 or above.

Personal and business loans are the two subcategories of unsecured loans. Personal loans include all loans obtained for personal requirements including medical bills, funding for college, renovating a house, etc. Business loans include those loans taken for the purposes of expanding a business, building an office, purchasing necessary equipment, etc.

Differences – secured loan vs unsecured loan

When it comes to deciding between a secured and unsecured loan, there are several key factors such as eligibility, interest rates, loan amounts, etc that will offer you clarity on the difference between secured loan and unsecured loan.

Feature Unsecured loan Secured loan
Eligibility
  • Applicants must have an employment record that serves as valid proof of having a steady source of income
  • Salaried professionals must exhibit income proof for a minimum of 2 years of employment, and self-employed professionals must exhibit proof for a minimum of 5 years of earning tenure
  • Salaried professionals must be within 21 and 60 years of age, and self-employed professionals between 25 and 65 years of age
  • Provide latest financial statements along when applying
  • Credit history sets the loan amount, as well as the rate of interest.
  • all unfinished EMI payments and pending loan payments of applicants are considered by the lender in ascertaining their eligibility
  • Applicants need not furnish any employment records, salary slips or ITR
  • Applicants should be at least 18 years of age
  • Must be a resident of the Republic of India
  • May be salaried or self-employed
  • Self-employed persons are required to exhibit proof of their business’ profits for the last 3 years
  • Value of assets must match or exceed required loan amount
Interest rates The interest rates are higher owing to the fact that no collateral is being offered as security. The repaying capacities of borrowers also play a part in the interest rates The interest rates are significantly lower since the assets are pledged as security. Lenders also tend to offer lower interest rates for borrowers with better repaying capacities, helping borrowers to pay off these loans quite easily
Loan amount The loan amount granted is entirely dependent on the income of the borrower. The greater the income of the applicant, the higher the loan amount Lenders offer a much higher loan amounts which corresponds to the value of the asset for applicants seeking secured loans as the risk involved is minimal
Processing time Takes more time as lenders will carry out complete background checks evaluating the repaying capacities of applicants With minimal documentation, better terms, and quicker processing times, getting a gold loan takes only a few hours. Loans against property take longer to process and require property ownership documents.
Loan disbursal time This is one of the major differences between a secured and an unsecured loan – the time taken for an unsecured loan is significantly longer than for other loans as the processing period is also long Shorter disbursal time owing to the fact that the time taken for processing is also short
Documents required Salaried professionals –

  • a few passport size photographs
  • proof of identity (Passport/Aadhar Card/Driving License/Voter Id/PAN Card)
  • proof of address (Utility Bill/Passport/Aadhar Card/Valid Rental Agreement for Current Address)
  • salary statements for the last three to six months

Self-employed professionals –

  • proof of office address
  • proof of profit-making
  • proof of payment of processing fee
  • a few passport size photographs
  • proof of identity (Passport/Driving License/Aadhar Card/Voter ID/PAN Card)
  • proof of address (Utility Bill/Passport/Aadhar Card/Valid Rental Agreement for Current Address)
  • salary statements for the last three to six months
  • Proof of identity (Passport/Driving License/Aadhar Card/Voter ID/PAN Card/Employee ID (only if the company is registered)
  • proof of age (Birth Certificate/Passport/Voter ID/Aadhar Card)
  • proof of income (salary slips for the last three to six months / an official document from the employer indicating details such as income, TDS collected, etc / salary certificate with a filled-in Form 16 attached to it)
  • proof of address (Utility Bill/Aadhar Card/Passport/Valid Rental Agreement for Current Address)
  • Depending on the asset being pledged as collateral, an applicant will also have to submit official documents that offer proof of ownership

Now that you are well-aware of the key differences between secured loan and unsecured loan, you might have a clearer idea about the entire secured vs unsecured loan debate. This will help you choose between a secured and unsecured loan much easier.

Getting a secured loan is not only much easier than getting an unsecured loan, but also offers some flexibility in terms of loan repayment. In addition, the interest rates on secured loans are lower, the loan amounts granted are higher and they also serve as a convenient credit enhancing mechanism for lenders to improve their credit histories.

Gold loan solutions

Gold loans are a great way to secure funds with ease. For those who have dormant assets such as gold jewellery lying around in a safe somewhere, getting a secured loan by using the gold as collateral is a great way to put the assets to good use with the promise of high LTV, lowest interest rates, and instant disbursal.

Rupeek’s loan solutions offer all the benefits of a gold loan at the best offers. As a secured loan, one of the advantages of a gold loan with Rupeek is instant loan transfer with fast and convenient processing. Rupeek also offers the lowest interest rates in the market with the highest LTV, promising you the best value for your gold.

With incredibly flexible repayment options and effortless application procedures, a gold loan with Rupeek also ensures your gold is safe throughout the tenure. Our lending partners include reputed banks like ICICI Bank, Karur Vysya, and Federal Bank. We also offer 100% insurance cover for your ornaments.  We strive to be the best gold loan provider in the market so that you never have to worry about availing a loan ever again.