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Home Articles Collateral vs Non Collateral Loan: What You Should Know

Collateral vs Non Collateral Loan: What You Should Know

IndianMoney.com Research Team | Updated On Thursday, November 07,2019, 02:46 PM

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Collateral vs Non Collateral Loan: What You Should Know

 

 

While applying for a loan people often fail to understand how the correct type of loan can work in their favor. Sometimes people opt for a personal loan to purchase a car or a plot of land and end up paying much more than required.

A collateral loan is best to fund your short term requirements whereas secured loans are better to finance specific requirements like the purchase of home, car or asset.

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So, the decision to go for a secured or unsecured loan depends on various factors like loan tenure, your requirements, whether or not you have collateral and your financial capability.

Let’s try to understand the major differences between the two:

What is Collateral Loan?

Collateral loans are also known as secured loans, which are taken out by pledging something that has a monetary value greater or equivalent to the loan amount. It acts as a security and thus protects the lender against monetary loss if the borrower fails to repay the loan. In case of a loan default, the lender has the authority to sell the asset to recover the loan amount.

A mortgage loan, two-wheeler and car loan and secured personal loans come under the secured loans category. Other types of secured credit consist of secured credit cards for which you have to deposit money equal to the credit limit issued by the lender.

See Also: Unsecured Loan

What is Non-Collateral Loan?

A non-collateral loan is also known as an unsecured loan. Here the loan is availed by evaluating the creditworthiness of a borrower bereft of collateral. The lender sanctions such loans to an individual who meets the eligibility criteria set by banks. Here the credit score of the borrower acts as a guarantee for loan repayment.

Unsecured loans have some major advantages. Some of them are:

  • Quick and hassle-free processing
  • Minimal documentation
  • Flexible repayment tenure
  • No collateral required
  • Fast approval
  • Ideal to meet short-term funding requirements

Types of Collateral and Non-Collateral loan:

Each type of loan is borrowed depending on the unique needs and circumstances of the borrower. Borrowers are benefitted through loans and so choosing between collateral and a non-collateral loan depends upon the situation and requirement of the borrower. Normally, lenders charge a lower interest rate for collateral loans as they are secured loan which is sanctioned for long-term. But if a person has an average credit score then lenders may charge a higher interest rate for even a secured loan.

See Also: How to Select The Best Home Loan in India? What Should I Consider?

Types of Collateral Loans:

  • Home loans
  • Secured business loans
  • Car loan
  • Two-wheeler loan
  • Loan against property
  • Education loan above Rs. 10 Lakh
  • Secured personal loans

Types of Non-Collateral Loans:

See Also: Secured vs Unsecured Loans

Difference Between Collateral vs. Non-Collateral Loan:

Given below are some of the major differences between secured and unsecured loans:

Particulars

Secured loan

Unsecured loan

Loan range

The loan is sanctioned depending on the value of the property. Most banks sanction a loan which is up to 90% of the value of the property or asset.

You can avail any loan amount ranging from Rs. 50,000 up to Rs. 20 lakh depending on your requirement and eligibility.

Credit score

A secured loan can be availed by people with a good credit score as well as people with average credit score

Unsecured loans are sanctioned for borrowers with a credit score ranging from 700 to 900 points.

Since there is no security to back the loans, these loans are given to creditworthy individuals.

usage

You cannot use secured loan for any other purpose other than the specified purpose

Some unsecured loan like personal loan, instant loan and credit card loans can be used for any purpose and you do not need to specify its end usage to the bank.

tenure

There are long term loans and the repayment tenure ranges from 15 to 20 years. However, for car/ two-wheeler/ education loan, the repayment tenure is comparatively lower as the amount sanctioned is also low.

Unsecured loans are short-term loans and thus their repayment tenure ranges from 5 years to 7 years.

Interest rate

Rate of interest is lower as the loan is backed by an asset.

Rate of interest on unsecured loans are higher due to the risk carried by the lender.

While applying for a loan, it is important to have a clear understanding of which type of loan will work best for your unique financial situation. However, before availing a loan make sure you can repay it back on time without affecting your budget.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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