There are two main types of personal loans: secured and unsecured. If you’re unsure about which type to apply for, it’s important to understand their differences.
Some banks and non-banking financial companies (NBFCs) offer personal loans without requiring collateral, while others do not provide loans without collateral.
Deciding which option to choose is ultimately up to you. Many people lack collateral, making it difficult to secure personal loans. If you fall into this category, consider banks and NBFCs that provide unsecured loans. Let’s explore the details of secured and unsecured loans.
What are unsecured loans?
Unsecured personal loans are granted without collateral. This type of loan is approved based on various factors, such as your credit score (CIBIL score), qualifications, financial capacity, employment status, age, and more.
Because unsecured loans do not require you to pledge assets, you don’t have to worry about finding a guarantor. These loans are considered “unsecured” since they are issued without security.
However, the increased risk for banks and NBFCs means they typically charge higher interest rates for these loans.
They will review your credit score and check whether your salary is deposited regularly into your bank account, usually requiring you to submit bank statements from the last six months. Unsecured loans are suitable for those without immovable assets, especially during emergencies.
What are secured loans?
Secured loans, on the other hand, require collateral. With this type of loan, you can pledge assets such as a home, car, or land as security.
Secured loans are ideal if you need to borrow a significant amount. They typically offer a more extended repayment period and lower interest rates, as banks and NBFCs face less risk when collateral is involved. A secured loan is usually the better choice if you can provide collateral.
Secured loan vs. unsecured loan – which one should you choose?
The choice between secured and unsecured loans depends on your circumstances, such as how much money you need and your financial situation.
A secured loan may suit you if you require a large loan and have valuable assets. On the other hand, if you only need a smaller loan, an unsecured loan could be the better option.
A secured loan is also wise if you want a more extended repayment period and lower interest rates. Secured loans benefit individuals with low credit scores or lack a stable monthly income.