A personal loan helps individuals meet their financial needs such as travel, education, or medical expenses. These loans are typically available in two categories, secured and unsecured. Each category has a unique process and structure driving it.
Choosing between them depends on a borrower’s financial situation, assets, and repayment capacity. Before applying, it is vital 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 personal 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
>> 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.
A personal loan is available in both forms, and each has its own unique process. Secured loans involve pledging of asset and may allow longer terms. Unsecured loans, on the other hand, do not require a collateral and may be helpful for small financial needs.
By knowing how each loan type works, borrowers can avoid confusion and prepare effectively for the application process. It goes without saying that one should read the terms before signing a loan agreement.
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