Secured vs Unsecured Loan: Which one should you opt for in an emergency?

Availing a loan could be your saviour whenever you need cash in an emergency. However, the type of loan that you opt for should be suitable to your financial needs. Before availing a loan, a careful assessment of various aspects is necessary. It’s important to evaluate various factors like interest rate, fees and EMI tenure before finalising a loan offer.

One can opt for a secured or unsecured loan depending on their requirements. However, knowing the difference between them is important for making the right decision.

What is a secured loan?

A secured loan refers to a borrowing that is backed by a collateral or guarantor. In this case, the risk of the lender is minimised in case the borrower isn't able to repay the loan. The lender can recover the due loan amount from the property or asset offered as collateral in case of default. Moreover, the loan approval process is longer as a thorough credit check of the borrower as well as the assessment of the collateral is done.

What is an unsecured loan?

An unsecured loan refers to the borrowing that isn't backed by any collateral or guarantor. The lender is at great risk here as they can't recover their money under any circumstances if the borrower fails to repay it. However, it's easier for the borrower to get an unsecured loan as the loan approval process is much simpler. Many lenders are now providing personal loans through a completely digital process for faster approval and disbursal.

What is the difference between a secured and unsecured loan?

The difference between a secured and unsecured loan has been discussed below.

•        Collateral: Secured loans need a collateral or guarantor for approval while unsecured loans don't need any mortgage.

•        Loan amount: Unsecured loans generally offer lower loan amounts than secured ones.

•        Repayment tenure: Secured loans generally come with a higher repayment tenure than unsecured loans.

•        Interest rates: The interest rates for unsecured loans are higher than secured loans.

•        Time for approval: Unsecured loans can be availed almost immediately as less paperwork is required. Conversely, secured loans require extensive paperwork and a credit check process before approval.

Secured vs Unsecured Loan: Which is better during an emergency?

Considering that an emergency is a sudden unfortunate event and suggests an immediate requirement of funds, opting for an unsecured loan would be better as they can be availed instantly. Many lenders also approve and disburse personal loans only within 48 hours. However, since the funds in an unsecured loan are limited it could be a problem if you need more money. In such cases, you can first opt for an unsecured loan to meet the immediate needs and then apply for a secured loan to meet the shortfall of required amount.