Ashok Bajpai, a marketer from Chennai, urgently needed money for an overseas medical trip. He applied for a Personal Loan but his CIBIL score was low and thus his loan application was rejected. Desperate, he asked his loan provider to keep his fixed deposit as collateral. The lender agreed and extended him the funds. Ashok thus managed to get a secured Personal Loan. This helped him to go abroad for his treatment.

Personal Loans can be secured or unsecured. Secured loans ask for collateral from the borrower. Meanwhile, lenders extend unsecured loans based on the borrower’s creditworthiness. Here is more about how secured and the unsecured loans work.

How does a Secured Personal Loan Work?

Lenders give you a secured Personal Loan after taking an item of value as collateral. The value of the collateral is usually the same as the loan value or higher. Lenders ask for cars as collaterals, as well as fixed deposits and cash certificates. Say, you fail to repay the loan. The lender has the legal right to seize the collateral and collect the dues. Meanwhile, you lose the collateral. Defaulting on the loan also damages your credit record.

What is an Unsecured Personal Loan?

This is the more common type of Personal Loan. Here, the lender does not ask for any collateral. Instead, it scrutinises your credit history to see your repayment habits. Say, you are unable to repay the amount. The lender initiates a legal procedure to get back the money. Unsecured Personal Loans charge a higher rate of interest because of the associated risk.

Differences between Secured and Unsecured Personal Loans

Here is a look at the main differences between the two types of Personal Loans.

    • Availability: Unsecured Personal Loans are more common in India. They are also available more easily. You can go online and apply for a Personal Loan in just a few minutes. For a secured Personal Loan, you have to visit the lender’s office. You have to explain why you need a secured loan. You would also need to declare what you want to pledge as collateral.
    • Interest rate: An unsecured loan is considered a risky financial product. So, loan providers charge a higher interest rate. The interest rates on secured Personal Loans are relatively lower.
    • Legality: Say, the borrower fails to repay a secured loan. The lender can issue a warning and then seize the collateral. No legal formalities need to be completed for this. But things are different for an unsecured loan. The lender has to start legal proceedings to get the money out of a defaulter.
    • Credit history: Many people take a secured Personal Loan because their credit scores are too low. You need a good credit score to get an unsecured Personal Loan. The requirements are less stringent in case of secured loans. You can check your eligibility online before you apply.

Read Blog :Tips to Improve Your Credit Score

The bottom line

Indeed, secured Personal Loans and unsecured Personal Loans have some key differences. Yet, both loans have an impact on your credit score. So, make sure you take a Personal Loan only when you can afford to pay it back.

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