Secured vs unsecured loans
How often have you searched for financial options to renovate your home, or your children for higher education abroad or for a wedding in your family? This would have involved a lot of research on banks, interest rates and tenor etc. In spite of being so deeply involved in the process, did you ever step back and checked if you should be taking a secured or an unsecured loan? The answer most probably is a no. A lot of people do not evaluate what will be better for them. Both are equally alluring and have their own advantages and disadvantages. Depending on your financial situation, you can choose which works better for you.
Secured loan is a loan backed by an asset (e.g. a car or property) you own also know as loan against property, in order to decrease the risk assumed by the bank.. The asset will be taken over by the bank if you fail to make the necessary repayments.
- A car Loan taken to buy a car that you always wanted.
- A home loan taken to buy a flat or house. You can also take it to refurbish your home.
- Secured business loan, where machinery, stock, raw material, building etc. are pledged against the loan amount required.
Unsecured loan is given on the basis of your income and expense behaviour and does not require any collateral. It offers the flexibility to choose the repayment tenure between one and five years and the best loan rates are generally given for borrowers looking to make repayments over three and five years.
- A personal loan taken for a vacation abroad, a wedding in the family, a business requirement, or for any other need for which you do not have ready liquidity. You can acquire this loan at a higher rate of interest for a comparatively smaller tenor.
- A credit card loan which is the most flexible form of short-term borrowings with easy repayment options.
- A bank overdraft which you can use to avail unsecured finance from your bank for your business.
The kind of loan you opt for should be decided on factors like
- Which type of loan has a lower rate of interest?
- Do you have any asset to mortgage?
- What is your repayment capability?
- What is the end use of the finance you need? Is it commercial or personal?
A secured loan should be preferred when
- Know your calculate repayments using home loan eligibility calculators.
- You get to choose between a fixed and variable rate (Home Loan) and decide to pay nothing for the initial term of the loan.
- You have greater financial flexibility and more savings options.
And, you should go ahead with an unsecured loan
- If you need immediate financial assistance with minimal paperwork.
- If the loan amount is relatively small.
- You don’t have an asset to mortgage
Next time when you need a loan, make sure you opt for a secured or unsecured load keeping these factors in mind.