Unsecured Vs. Secured Loan

by Finway FSC Empowering People Financially

When planning to take loans, you often need to discern between which one to take. The type of loan you need to take depends upon your need and the largely upon your credit score. Let us first understand the types and difference between the broadly classified loans. The two loans that are often taken are the unsecured and the secured loans.

Unsecured loans: These loans can are taken for a specific purpose such as to enhance the business or to begin the business and are generally referred to as the unsecured business loan. The interest rate for such loans is usually high as the bank's money is at stake. Even the paperwork done for this kind of loan is under stringent scrutiny. However, after submitting the documents and verification process, getting a loan becomes seamless.

Secured Loans: These loans are taken by the bank against collateral. The collateral can be gold or property. In this case, the interest rate is not high as the bank already has collateral as the security. While a customer opts for this kind of loan against property, the repayment tenure is large, however, failing to pay on time asset given as collateral is taken by the bank as the penalty.

Determining the kind of loan to be taken

When you have a good credit score and require a large sum of money, you must opt for Unsecured loan. The reason to take this loan is simply your credit score building. Besides this loan can be repaid without any prepayment charges, in case you wish to pay before the tenure. People usually pay this before time because the interest rate is higher.

If you are contemplating on building your credit score from zero, it is best in your interest to opt for Secured loan. The secured loan has a low rate of interest as the collateral is given to the bank. Go ahead and take this loan if you are sure to repay this in the stipulated time period and not before to avoid the prepayment charges.

Paying off the loan

If you are having troubles to pay off the loans when you have both secured and unsecured loans, then it is advised that you first pay off the secured loan. This is because collateral should not be lost. An unsecured loan will levy penalty, so as and when you are comfortable to pay, pay it off.