The Advantages and Disadvantages of Secured vs Unsecured Personal Loans

Banks and financial institutions offer customers two major kinds of loans – secured and unsecured. Secured loans are guaranteed by collateral, whereas unsecured loans have no collateral backing them. Read more to understand the advantages and disadvantages of secured and unsecured loans before picking the one that suits you the best. You are also advised to verify the personal loan interest rate and calculate personal loan EMI on an online calculator before deciding. 

Advantages of Secured Loan 

Under a secured loan, your bank can ask you to mortgage your house, vehicle, or even a secured credit card against the loan. 

The advantages of a secured loan are: 

• The eligibility requirements for a secured loan are flexible. It is because applicants offer collateral against their loan, which the lender can sell in case of non-repayment. Due to this safety net, most lenders do not have any stringent eligibility rules for secured loans. 
• The personal loan interest rate offered on a secured loan is much less than the personal loan interest rate offered on an unsecured loan. This factor makes the cost of borrowing secured loans much cheaper than that of unsecured loans. You can use any online calculator to calculate personal loan EMI based on your personal loan interest rate to get a better idea of the repayable debt. 
• The borrowing limits are much higher in secured loans as compared to unsecured loans due to the existence of the collateral. You can calculate personal loan EMI to understand your borrowing limit and EMI amount further. 

Disadvantages of Secured Loan 

While the features of secured loans sound extremely attractive, it also has certain drawbacks. 

• In case of non-repayment of the loan amount, the lender will take your collateral away. Thus, with secured loans, you are always at risk of losing your prized assets. Hence, you should always calculate personal loan EMI and keep track of its repayment. 
• Moreover, if you can’t repay the loan, it can adversely affect your credit score. A low credit score can harm the chances of getting loans in the future or from availing of rewards and deals on your credit cards. 
• Secured loans also have a restriction on the usage of the loan amount. For example, if you take a secured car loan, you will compulsorily use the loan amount to purchase a car. There is no flexibility in the manner in which you can use your loan. 

Advantages of Unsecured Loan 

If you opt for an unsecured loan, you do not have to deposit any collateral with the lender bank. 

Here is a quick look at the pros of unsecured loans. 

• You do not need any collateral to get an unsecured loan. It means that in case of no repayment of the loan amount, your assets will not be taken away by the lending bank. However, in some scenarios, when the applicant cannot pay off their loan, the court might order the lender to take away any of the applicant’s assets legally. Thus, you should calculate personal loan EMI and keep track of its repayment timeline. 
• There is no restriction on how the loan can be used. You can use it for any requirement, like paying off medical bills, funding higher education, or paying off other debts. 

Disadvantages of Unsecured Loans

The drawbacks or the cons of unsecured loans are given below:

• The personal loan interest rate is much higher on unsecured loans than on secured loans. 
• The eligibility criteria for unsecured loans are much harder than secured loans. It is because the lender must be sure that the borrower can repay on time without fail. Thus, individuals with bad credit scores might find it hard to get this loan. 
• Some lenders may charge origination fees of up to 10% of the loan amount. It adds to the borrowing cost of unsecured loans. 
• Finally, similar to secured loans, non-repayment of the loan amount can derail your credit score. 

Conclusion 

Secured and unsecured loans both have certain advantages and disadvantages. You should take a look at them carefully before opting for one. If you have an asset you can give as collateral and are confident that you will repay the loan on time, you should opt for the secured loan. However, if you cannot give up any of your assets and might have problems paying off the loan amount, you should opt for an unsecured loan.