14 May, 2025 | 11:01 IST
One of the most popular ways to meet financial requirements is to avail a personal loan. From fulfilling long-term goals to taking care of short-term needs, a variety of loan options are available in the market. One of the choices that a loan seeker faces is whether to opt for a secured or an unsecured loan.
While both types of loans can help you with your financial requirements, they have different characteristics. As the name suggests, a secured loan comes with the security of an asset. Thus, if the borrower does not repay the loan, the lender can use the market value of the asset to recover the loan.
Such security is not attached to an unsecured loan. It is a common option for those who don’t want to or can’t pledge collateral. But, are these loans more expensive for the borrower?
Let’s check key factors you should evaluate before applying for an unsecured loan.
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An unsecured loan is a loan for which a borrower does not need to provide any tangible security. Common examples of such loans include student loans and personal loans. In comparison to secured loans, the risk involved in granting an unsecured loan to a borrower is much greater for a lender. The loan is granted based on factors such as credit report, employment history, bank statements, monthly income, and existing debt.
When it comes to loans, it is important to study the terms and conditions that are attached to the loan before filling up the application form. Wisdom lies in comparing different loan options to check which offers you the best deal.
For this, you can visit the websites of different banks. To make it simpler, you can explore multiple loan offers on Moneycontrol platform. You can apply for personal loans up to Rs 50 lakhs, with interest rates starting at 10.5% per year. The loan approval can happen instantly or in a few days, and then the money gets credited to your account.
The interest component forms a major part of the personal loan cost. Apart from the interest levied by the lender, you may be asked to pay other fees and charges while taking out a personal loan. Many lenders charge a processing fee for the loan application, which could be a fixed amount or up to 2-5% of the loan amount, depending on the terms and conditions. There could also be prepayment fees and additional charges for payment defaults. The interest rates on unsecured loans can range from 10% to 45% per annum. Typically, most banks and Non-Banking Financial Companies (NBFCs) will charge 10.5% to 24% per annum. It may go up to 45% for those with a risky credit profile.
It’s advisable to evaluate all these factors to know the overall cost of your personal loan.
Simple Application Process
Since unsecured loans do not require collateral, the application process is simpler compared to a secured loan. This makes the loan application process easier to go through.
Quick Disbursal
The requirement for documentation is minimal in the case of unsecured loans. Thus, it is often sought by those who need to access money quickly.
No Requirement For Collateral
An unsecured loan can be a good choice for those who want a loan but do not have any collateral to pledge as security. Once you apply for an unsecured loan, the lender will check factors such as your credit score and income to decide on your loan application.
High Interest Rates
As unsecured loans come with no security, granting them involves a significant risk for the lender. If the borrower defaults, the lender has no specific asset to seize and sell to recover the outstanding amount. A lender compensates for this increased risk by charging higher interest rates compared to secured loans.
Lower Borrowing Limit
The borrowing limit for unsecured loans is generally lower compared to that for secured loans. It may not be ideal for those who want a large sum that exceeds the maximum borrowing limit allowed by a lender.
Strict Eligibility Criteria
Since the lender takes a big risk in providing a loan without securing it with collateral, it needs to ensure that only worthy applicants get the loan. That is why unsecured loans have strict eligibility criteria.
Short Repayment Period
The repayment period for unsecured loans is usually shorter for unsecured loans compared to secured ones. It leads to high monthly installments for repayment.
ALSO READ: What is the maximum and minimum tenure for personal loans?
To conclude, the interest rate on unsecured loans is typically higher compared to secured loans. This is the tradeoff for getting the loan without providing collateral. Further, the repayment period is usually shorter than it is for a secured loan.
A secured loan is good for those who want a lower interest rate and longer repayment tenure. However, if you want a loan but have no collateral to pledge, then you can consider taking an unsecured loan. In this case, you will need to ensure that your credit profile inspires confidence in the lender to provide you with the loan.
If you are looking forward to applying for personal loans, Moneycontrol offers access to multiple loans in partnership with eight lenders. The loan amount can go up to Rs 50 lakhs with interest rates starting at 10.5% annually. You can go online and review the conditions attached to different loans, and decide which best meets your needs.
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