Secured vs. Unsecured Loans - What Should Women Opt For?
With over 30 million women borrowers, Indian women are scaling new heights in the credit landscape. Due to the increase in income and purchasing power, it is no surprise that Indian women are borrowing more. But with so many loan options, are we borrowing right?
The kind of loan you take - Secured or Unsecured determines your interest rate, tenure and quantum of borrowing. Let’s learn more about which kind of loan you should opt for?
What is a Secured Loan?
Secured loans are taken for a fixed purpose like buying a house or car. Examples of a secured loan are home loan, car loan and mortgage. When you take a secured loan, you need to provide collateral as security. The collateral must be of equal or higher value than the loan you intend to take. If you fail to pay the loan instalments, the lender takes possession of the collateral.
What is an Unsecured Loan?
These are multi-purpose loans that can be taken for any purpose such as the purchase of electronics, children’s school fees, marriage expenses or meeting a medical emergency. Personal loans and credit cards are types of unsecured loans. You do not have to provide a collateral for unsecured loans. Usually, unsecured loans are taken when there is an immediate requirement for money and you do not have an emergency fund.
How are Secured Loans different from Unsecured Loans?
Borrowing limit: You can get higher quantum loans with Secured Loans as you are providing collateral as security. Unsecured loans are for smaller amounts.
Interest Rate: The rate of interest in secured loans is relatively lower as the risk to the lender is less due to the collateral provided. Unsecured Loans like Personal Loans and Credit Cards have extremely high-interest rates.
Tenure: Secured loans have a longer tenure and can be taken for 15 – 30 years. Unsecured loans are of much shorter tenures with the maximum being 5 years.
Approval and disbursal of loans: Since the paperwork and legal compliance is more in secured loans, it takes longer to obtain the loan. Whereas in unsecured loans since the paperwork is much lesser the approval and disbursal are within a few hours or days.
Terms and conditions: While taking a secured loan, you have a higher negotiating power and can settle for more favourable repayment terms. This is possible due to the presence of collateral as security. Unsecured loans have less favourable terms for the borrower.
Is a Secured Loan Better than an Unsecured Loan?
There is no such thing as ‘better’ when it comes to taking a loan. You must focus on which loan meets your requirements and is beneficial for you.
While the advantages of a secured loan are larger loan limits, lower interest rates, longer loan tenure and flexible repayment terms, you must think about the following points –
What is the urgency for the loan?
If you are in urgent need of money and do not have an emergency fund, you can consider taking an unsecured loan. Unsecured loans are easier to obtain and require lesser paperwork. Unsecured loans like credit cards help you take care of household expenses while allowing you a grace period for repayment and a huge variety of rewards.
Am I comfortable giving my asset as collateral?
If you have a slight doubt that you may default on the loan or fear losing your collateral due to default, you must not opt for a secured loan.
I have a low credit score!
Due to the security of collateral, even with a relatively low credit score, you may obtain a secured loan. It is more difficult to get an unsecured loan with a low credit score. With a low credit score, you may also have to pay a higher interest rate.
While women tend to get loans at lower interest rates than men, it should not be an incentive to take on more debt. Taking secured or unsecured loans, even though beneficial to maintain credit history, still amounts to having debt. If your loan is only covering some expense for you and not helping you build an asset, you need to think twice.
This entire month we will be focusing on loans. Stay tuned as we discuss loans and credit scores and address the most common doubts on taking loans.
This article is written by Namrata Patel for Basis
Basis is a first-of-its-kind platform, aimed at enabling women to achieve financial independence through expert advice, in-app knowledge Boosters and supportive communities.