Know the Difference: Secured Loan vs. Unsecured Loan

When you decide to take a loan from a bank or an NBFC, they offer you the loan in two ways: secured loan and unsecured loan. The borrower has to choose any one before signing the loan and it can’t be changed until the whole loan amount is paid in full. The basic difference between these two is that in secured loan, applicant has to put collateral where as in unsecured there is no collateral required.

We have discussed the differences between secured and unsecured loan in details to clear your confusion and borrow right:

Category	Secured Loan	Unsecured Loan
Collateral	You have to pledge your property, vehicle or policy as collateral to receive a loan. It works as security against default payment. If the borrower misses the payment or can’t complete the payments, bank can take away your pledged collateral.	Here you do not need to provide any property or vehicle as mortgage. Unsecured loans are given without any collateral. Applicant’s financial and professional history is taken into consideration by banks before giving loans.
Use of Funds	The use of the loan amount in secured loan depends on the type of loan. For example, if you opt for a car or home loan you have to use the amount for the mortgaged property only. But if you take a gold loan or a LAP, the amount you use can be for any reason.	In unsecured loan, you could use the loan amount for any purpose as it is a multi-purpose loan. Bank do not restricts the borrowers as to where they should spend the borrowed money.
Eligibility	The applicant must be 25 years old while applying for the loan. Also the applicant should have a stable income history, strong CIBIL score and should be paying ITR or should be able to present form 16 and should own a property in any type to keep as collateral.	The applicant must be 25 years old while applying for the loan. Also the applicant should have a stable income history, a very strong CIBIL score and should be paying ITR or should be able to present form 16.
Process	A secured loan sometimes takes at least 7 to 15 working days to get approved. But it depends on the type of loan. If a borrower opts for a home or car loan, it takes a few days where as a borrower can get the funds within an hour in gold loan.	An unsecured loan is approved quickly as it requires minimum documentation. Borrowers get the funds within 48-72 hours.
Interest Rate	Interest rate in secured loan is lower as banks have kept collateral in case of default. It works as a security for them.	An unsecured loan has higher interest rate as banks do not have anything else as security at their end if a default situation arises. They have interest rates as high as 30% thus making them the costliest type of loans.
Loan Amount	The borrower get the amount of certain percentage of the product value they want to buy or the product value which is being kept as collateral. The highest percentage of amount is 90%. The percentage changes from bank to bank and by the type of loan.	The amount allotted in unsecured loan totally depends on the borrower’s income, requirement, employment status, credit history, bank’s policy and borrower’s capacity of repayment.
Tenure	Secured loans are longer in tenure. The tenure goes up to 30 years in home loans. But in gold loan it’s about a few months period. The tenure changes from bank to bank and by the type of loan.	Unsecured loans are mostly short term loans. The tenure ranges from 5 to 7 years.
Examples	1. Home Loan 2. Car Loan 3. Gold Loan 4. Loan Against Property etc.	1. Credit Cards 2. Personal Loan 3. Student Loan etc.