Loans offer a much needed financial relief during an emergency or even otherwise for an expensive purchase. However, they can be both secured and unsecured.
A loan wherein an asset (house, gold, etc.) is used as a collateral or security is known as secured loan. It is a good option for both the lender and borrower.
For secured loans, the lender dispensing the loan will hold on to the ownership of these assets until the loan is fully paid.
Unsecured loan, on the other hand, isn't backed by any collateral. They tend to be risky for the lender.
The high risk associated with unsecured loans is compensated with equally high interest rates charged from the borrower.
Lending criteria is relaxed for secured loans due to lower credit risk. Thus, interest rate is also relatively lower for loans backed by collaterals.
Example of secured loan includes loan against property, car loan, etc. Meanwhile, credit card, personal loans and student loans come under unsecured loans.
Unsecured loans are for shorter duration (repayment duration is less) but secured ones can be approved for long term as well.
If borrowers go for secured loan with collateral backing, it will be approved easily with flexible terms and conditions. But unsecured loans don't offer this benefit as the risk is high for the lender.
Often times, a borrower may be struggling with a weak credit score. Such people can get a desired loan only in case of enough collateral backing.
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