Difference between Secured and Unsecured Loan Explained

Understanding the key differences between secured vs unsecured loans.

Key Takeaways

You can avail of two types of loans – Social and Unsecured.
Banks extend secured loans against collateral or security.
In the case of Unsecured Loans, banks do not ask for collateral.
Secured Loans are ideal for lower loan amounts, whereas banks provide unsecured loans for higher loan amounts.
Interest rates offered on unsecured loans is higher than those on secured loans.

Life is unpredictable, and you might need to rely on financial aid to meet certain unforeseen expenses. To meet such financial challenges, you can rely on bank loans. While there are several kinds of loans that help you fulfil different requirements, in general, banks broadly classify loans into two types – secured and unsecured Loans. Find out what is secured and unsecured loan in this article.

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Secured vs Unsecured Loan

Secured Loan

When you apply for a high-amount loan, the bank typically asks you to provide collateral. The collateral can be any asset the bank accepts – property, gold, investment certificates, etc. The bank keeps this collateral in its possession and provides you with the loan. Such a loan is known as a secured loan or a loan against collateral as it allows the bank to safeguard or secure its investment. The loan amount you get is usually 60% to 75% of the value of the assets provided as collateral. The bank holds on to the documents of your assets until you repay the loan in full.

Unsecured Loan

An unsecured loan is a loan where you do not have to provide any collateral. Banks typically extend unsecured loans when your fund requirements are low, for instance, Personal Loans. When a bank grants you an unsecured loan, it is undertaking a greater risk and thus charges you a slightly higher interest rate. Without the assurance provided by collateral, banks rely on other factors like your income, credit history and credit scores to decide the loan amount.

Differences between Secured and Unsecured Loans

Borrowing Limits

You can get higher loan amounts (including in crores) with unsecured loans, thanks to the collateral you would have to pledge to acquire it. The borrowing limits for unsecured loans are usually low since you do not have to provide collateral.

Rate of Interest

Since you provide collateral as an assurance with a secured loan, you can enjoy lower interest rates. Conversely, banks need to manage the risks associated with collateral-free unsecured loans and charge higher interest rates.

Lender’s Risk

For banks, secured loans offer better security and reduce the risk for the lender. Lenders can auction off the collateral provided to recover their investment. Such protection does not exist for unsecured loans.

Repayment Tenure

Secured Loans such as home loans come with longer repayment tenures of up to 30 years. Unsecured loans like Personal Loans or Auto Loans come with shorter repayment tenures of 60 months and 84 months, respectively.

Apply for Secured and Unsecured Loans with digibank

With digibank, you can apply for secured and unsecured loans conveniently. You can provide assets as collateral and get higher borrowing limits on unsecured loans. You can just as easily avail of secured loans by providing your credit report featuring good credit scores. So, whether you need a Car Loan, a Loan Against Property, or any other loan, you can visit digibank to begin the loan application process.

Download the digibank by DBS app to get started and even open your savings account with us.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.