A personal loan
helps individuals manage financial needs such as travel, education, or medical
expenses. These loans are available in two categories, secured and unsecured.
Each type follows a different process and requirement structure. Choosing
between them depends on a borrower’s financial situation, assets, and repayment
capacity. Before applying, it is important to understand how each loan type
works. This article explains the key difference between secured and unsecured
personal loans.
Understanding Secured Personal
Loans
A secured personal
loan is a type of loan that requires an asset as security. This
asset can be a house, a vehicle, or a fixed deposit. The borrower offers this
asset to the lender until the loan is repaid. If the borrower is unable to
repay, the lender may use the asset to recover the remaining loan amount.
Secured loans usually involve larger loan amounts and longer repayment periods.
The loan amount depends on the pledged asset’s current value. Common examples
of secured loans include home loans and loans against property.
How Secured Personal Loans Work
Here is how a
secured personal loan works:
● Collateral Requirement: Secured personal
loans require the borrower to pledge an asset. This may include property
documents, gold, or savings deposits.
● Loan Amount Based on Asset Value: The
loan amount depends on the current value of the pledged asset. Lenders usually
check the asset’s condition and market value.
● Longer Repayment Duration: Borrowers may
receive longer repayment terms on secured loans. This helps manage the loan in
smaller instalments.
● Verification of Asset Documents: Before
approval, lenders verify documents related to the pledged asset. This includes
ownership proof, valuation report, and condition checks.
●
Lower Interest Rate
Possibility: Since the asset offers security to the
lender, the personal loan interest rate may be lower.
Understanding Unsecured Personal
Loans
An unsecured
loan does not require any assets or property as security. The lender offers the
loan based on the borrower’s credit score, income, and repayment history. It is
commonly used for personal needs such as wedding expenses, travel, or medical
treatment. Since there is no asset involved, lenders assess the borrower’s
repayment capacity through documents. The approval process depends on the
borrower’s employment type, income level, and other financial details.
How Unsecured Personal Loans Work
The following
points may help you understand how unsecured personal loan works:
● No Collateral Needed: Borrowers do not
need to pledge any property or asset to get an unsecured personal loan.
● Approval Based on Credit History: Lenders
approve loans based on the borrower’s credit history and monthly income.
● Shorter Repayment Periods: Unsecured
loans are generally offered for shorter durations ranging from one year to five
years.
● Document-Based Assessment: Lenders check
documents like salary slips, bank statements, and identity proof to process the
loan.
● Fixed Loan Amount Range: The loan amount
is usually fixed based on the borrower’s income and repayment capacity. It may
not exceed a certain limit.
● Higher Interest Rates Possible: Since there is no asset to secure the loan, the personal loan interest rate may be higher.
Difference Between Secured and
Unsecured Personal Loans
The following
table outlines the key difference between secured and unsecured personal loans:
|
Feature |
Secured Personal Loan |
Unsecured Personal Loan |
|
Collateral |
The borrower |
The borrower |
|
Interest Rate |
The interest |
The personal |
|
Repayment |
Secured |
Unsecured |
|
Loan Default |
If the |
If the |
Conclusion
A personal loan
is available in both secured and unsecured forms, and each has its own process.
Secured loans involve asset pledging and may allow longer terms. Unsecured
loans do not require property and may be helpful for small financial needs.
Understanding the differences can help individuals choose the loan that aligns
with their needs and financial situation. It is important to understand the
loan terms, required documents, and repayment structures before making a final
decision. By knowing how each loan type works, borrowers can avoid confusion
and prepare effectively for the application process. Always read the terms
before signing a loan agreement.
