Secured Vs Unsecured Loans: How To Pick The Right Option For Your Needs

A secured loan is backed by collateral such as property, gold, or a fixed deposit. An unsecured loan, in contrast, doesn’t require any security.

Unsecured loans include personal loans and credit cards, where no collateral is needed. Instead, the lender evaluates your income and repayment capacity.

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Loans play a key role in helping us achieve our financial goals. Whether it’s buying a house, funding education, or handling urgent needs, loans let us stretch our financial capacity. When taking a loan, you generally have two options—secured or unsecured.

A secured loan is backed by collateral such as property, gold, or a fixed deposit. An unsecured loan, in contrast, doesn’t require any security. Both serve different purposes and come with their own conditions. Before borrowing, it’s important to know which type suits your needs.

Some basic differences between the two

Secured loans include home loans, car loans, loans against property, gold loans, or loans against fixed deposits. Here, the lender has the safety of an asset pledged against the borrowed amount.

Unsecured loans include personal loans and credit cards, where no collateral is needed. Instead, the lender evaluates your income and repayment capacity.

Factors to decide which loan is better for you

• Loan amount – Unsecured loans depend on your income, making them ideal for smaller amounts, while secured loans rely on collateral and suit larger needs like buying a home or car.
• Interest and charges – Collateral-backed loans usually have lower interest, while loans without security cost more and may include prepayment fees.
• Repayment tenure – Short-term loans usually last up to five years, while loans backed by collateral can extend up to 30 years, offering more repayment flexibility.
• Impact on credit score – Defaulting on any loan negatively impacts your credit score. Defaults on unsecured loans have a stronger and longer-lasting effect because lenders cannot rely on collateral to recover funds.
• Right loan for the right need – Match your loan to the purpose. For long-term needs like a home, loans backed by assets are usually cheaper, such as borrowing against an FD at 1-2 per cent above its rate instead of breaking it. For short-term needs of six months to two years, personal loans are faster and require less paperwork, though they carry higher interest and may have prepayment penalties.
• Other key factors – Secured loans typically offer lower interest, higher amounts, and longer tenures, though processing takes more time. Unsecured ones carry higher rates, are limited by income and credit history, have shorter terms, but are faster to process. Collateral-backed loans are widely accessible, while unsecured options depend on a strong credit profile.

Things to keep in mind

Don’t opt for an unsecured loan just because it’s easier. Multiple loans can signal “credit hunger” and hurt your score. Use that option only for genuine short-term needs, and if using a credit card, repay on time to build a strong credit history. 

Be mindful with collateral too. If you need Rs 80 lakh and the bank offers 80 per cent of a Rs 1 crore asset, avoid pledging more than necessary as smaller assets help maintain flexibility. Above all, borrow within your repayment capacity, repay on time, and review your loans regularly.

(The author is the CEO at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)

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