Loans always play important in any company’s or single individual growth and progress, if the loan amount is utilized properly it can bring a lot of progress in business or career.
You might be thinking what is a loan and how many types of loans are available there in banks or financial institutions.
In simple terms, loans refer to money which a company or an individual borrow from a bank or financial institution.
Loans are classified into two categories secured loans and unsecured loans so let’s find out the features and difference between secured and unsecured loans.
A secure loan is a type of loan in which loan is protected by an asset or loan is given by the financial institution to the borrower and your asset is used as collateral or security.
A secure loan is considered to be the safest loan for lenders because lenders have legal control over the collateral asset if borrower refuse or unable to repay the loan. In that case lender can recover its money from the collateral asset.
Secure loans are usually given after a valuable asset such as land, house, gold or car etc is used as collateral or security. Since the loan is secured by collateral asset so it poses minimal risk to the lender.
Basic features of secure loan
Since loans are provided by banks on the basis of a collateral asset and a lot of paperwork is also required to complete before handing over the loan amount to a borrower, so it is very difficult to qualify for this loan.
The loan cannot be provided if a person does not have an appropriate asset.
The loan is offered on the security of collateral asset so the borrower has the option to borrow a large amount of money from the bank. The borrower can get loan against as much as asset as He/She have.
Repayment tenure can be long such as 5 to 10 years or can be even more.
Advantages of secure loan
Banks usually offer secure loan at low-interest rates.
The repayment tenure is longer which put less burden on you. You have a lot of time to repay debt.
If you repay the loan amount on right time it increases your credit score or creditworthiness.
Disadvantages of secure loans
If you do not pay the loan on time then it can damage your credit score.
Since the loan is given on the security of asset so if you are unable to pay the loan amount than lender has legal rights to take over or sell your asset to recover the payment.
Common examples of secured loans
Home loan – Banks usually provide home loans in which you can purchase or finance your new home. Your home is used as a collateral asset.
Vehicle loan – Vehicle loan is offered in which you can finance your vehicle and your vehicle is used as the collateral asset.
Loan against property – Loan against property is the most common secure loan, in this loan your home, land, factory or commercial building etc is used as the collateral asset. This loan has the lowest interest rates and granted by banks easily.
Gold loan – The gold loan is a loan in which gold is used as a collateral asset, banks usually grant amount which is 70-80% of gold’s market value.
Unsecured loans – As the name suggests, the loan is unsecured and the loan is not backed by any collateral such as property, gold, vehicle or financial bonds etc.
An unsecured loan is offered by banks on the basis of your credit score or creditworthiness. Since banks or financial institution do not use any asset as collateral so this type of loan poses maximum risks to lender.
Basic features of unsecured loans
Since the loan is not secured by collateral and poses a maximum risk to the lender so banks charge higher interest rates on this loan.
Banks or financial institutions only offer small amount under unsecured loans.
Advantages of unsecured loans
Timely repayment of the loan can improve your credit score.
You can use the loan amount for any personal use whether you want to buy some gadgets or you can finance tour etc.
Since none of your assets is used as collateral so if you are failed to repay the loan, banks cannot take over any of your assets.
Disadvantages of unsecured loans
Banks offer unsecured loans at very high-interest rates, which can put a lot of burden on you which repayment of the loan.
Tenure of repayment of the loan is short, you have to repay the loan amount to the bank in a short period of time which make EMI relatively large.
If you are failed to repay the loan or missed payment than it can damage your credit score.
Common examples of unsecured loans
Personal loans – Personal loans are a type of unsecured loans, you can use the loan amount for any personal purpose such as buying a laptop, computer, wedding expense or a medical expense. Bank can offer you a few thousands to lakhs rupees depending on your income and credit history.
Credit cards – You can use a typical credit card for shopping or any of your personal purpose, it will bills you once a month and will charge interest on the outstanding amount every month.
Personal lines of credit – Personal lines of credit loan is pretty much similar to the credit card. It has approved credit limit which you can use for any of your personal purposes, credit limit depends on your income and credit history. This type of loan has lower interest rates and interest is only applied on the amount which you withdraw or spend from your credit lines.