The world moves around money. No matter which part of the world you belong to, you need money to survive. Your ultimate, unmatched or unique skills hold no value if you cannot convert them into financial benefits. Here we are not talking about those super rich people who have more than enough money to fund their desires. We are talking about common people who take loans to fulfill their current financial needs. They take a loan for a car or take an education loan to continue studies. Therefore, in this article we have something for everyone. Starting from the basic definition of loan to Secured loan and Unsecured loan. In addition we will also talk about the difference between Secured loan and Unsecured loans to make things easy. Let us start the article by understanding the meaning of loan.
What is a loan?
When we borrow money from a bank or an individual with a commitment to repay it back after some time is a loan. However this is a common definition of a loan. In financial terms it is a form of debt incurred by an individual or a financial institution.
Types of Loans
There are many types of loans such as Home loans, personal loans, student loans, car loans or auto loans and credit card loans etc. However, you can categorize them into two simple terms. Secured loans and unsecured loans. Let us now understand both one by one.
Understand Secured loan and Unsecured loan
Taking a loan is an important decision. Therefore, you should know the clear difference between secured and unsecured loans. Let us now understand both one by one.
The definition of secured loans is hidden inside the name itself. Secured loans are types of loans that require some collateral against the money. For example: a loan against property is a secured loan. You submit the original property documents with the bank. You also give them the right to sell the property if you are unable to pay the installments on time. In some cases this really happens and banks take possession over the property and set properties for auction.
Another example is loan against Gold. If you do not pay the installments, banks auction your Gold to recover the loan.
List of Secured loans
In the secured loans vs unsecured loans debate this is a common question. Therefore, we should know what all loans come under secured loans. All the loans mentioned below can be termed as secured loans.
This is the most common secure loan type that most people take at least once in life. Home loan interest rates are normally lower than other loans. Property is a high value asset. Due to this, the tenure of home loans is also higher. It can be anywhere between 20-30 years depending on your age and bank’s consideration of tenure.
Auto loan or car loans
Interest rates of car loans are higher than home loans. In this case, the bank takes possession of your car in case of continuous missed payments.
When it comes to secured loan vs unsecured loans the second option is always better. An unsecured loan is proof that your credit score is good. In addition, when you borrow money from a bank, you do not need collateral. Therefore, if your credit score is not good you should clear your unpaid loans. The idea is to improve credit score before you apply for an unsecured loan. Otherwise, this may become one of the reasons for loan rejection. Some of the most common types of unsecured loans are these:
A personal loan is a short term loan that you take. There are many reasons for taking a personal loan. Some of them are very interesting and make a lot of sense. The duration can be anywhere between one year to five years. The chances of personal loan approval depends on your credit rating and payment history. If your credit score is good, banks provide this loan easily. In addition you do not need to keep anything as collateral for taking a loan from the bank.
Student loans or Education loans
The cost of education is high. Due to this many students opt for this option. They take student loans or education loans to continue their education journey. Education is an investment that pays return later in the form of a better job. Therefore, many students apply for it. In most cases, parents or guardians become guarantors. Guarantor is an important person in the education loan approval process. Banks consider checking their credit history before approving the loan and transferring the money.
Which one is better if you compare secured loan vs unsecured loan?
Whichever loan offers more value to you is better. For example: you should apply for a home loan to buy a house. This is due to the fact that these are high value loans, the tenure is also long and the interest rate is high. If you fulfill this requirement with a personal loan, the monthly installment will be very high. You may not be able to pay this from your regular salary. Similarly for a small vacation you cannot put your house as collateral. A simple personal loan (unsecured) will fit better. First of all check your financial requirement, payback time and the interest rates. If all fits well, apply for a loan.
What is the difference between a secured loan and unsecured loan?
Secured loans demand you to offer something you own as a collateral. Banks keep that asset as security in case you do not pay the money back with interest. In this case they sell your asset to recover the loan. This is also a reason why it is important to repay the loans. The tenure of secured loans ranges between 1 year to 7 years in general. Car loans, home loans, gold loans etc. come in the secured loans category.
A personal loan, education loan or credit card loans come under the unsecured loans category. There is no collateral connected so no asset is at risk. But this does not mean you can skip the payments.
What happens to the house if I do not pay the installments on time?
Nothing happens to the house if you miss a few installments. Banks also understand about the hardships that come. They give you time to repay. They often send you reminders. In addition you can also restructure your loan in case of a hardship. If all the efforts fail, banks have the right to take possession of your house. They will auction the house in order to recover the loans.
Compare interest rates of secured loans and unsecured loans. Which one has higher interest rates and why?
Interest rates of unsecured loans are higher than secured loans. This is because banks do not have a security net unlike secured loans. As a result they prefer to charge as much money as possible in the initial phase of the loan tenure. Due to this they keep the interest rates of unsecured loans on a higher side.
How can I make payment online in case of an unsecured loan?
Normally banks take an undertaking from you for deducting payments from your bank. There is a payment due date of loan installments. As soon as the dates arrive, bank debit your monthly loan installment amount. Therefore, no need to worry about making online payments or offline. However you can read our article about how to accept payments online and make payments online.