Difference Between Secured and Unsecured Loan
A loan is said to be secured loan when it is attached to a valuable asset like house, machinery, land, car or any other property which if the loan is not repaid as per its terms, can be possessed by the lender and sold off and it is generally issued by banks and other financial institutions while a loan is said to be unsecured loan if no such collateral is attached to it and is generally issued to family, friends and relatives fie their fund requirement having no credit risk.
These loans differ, especially on one condition – one is protected by an asset, and another isn’t protected. But this is not the only difference between them.
A secured loan is a loan that is usually given on a lien. It is protected by an asset/equipment. As an example, we can say that a secured loanSecured LoanA secured loan is one where the borrower pledges his/her assets as a collateral to the issuer as a security. In the event of nonpayment of the loan, the issuer has the right to sell or transfer the secured property in order to recover the balance owed. is taken to a house or a car, and it is protected by the same. As it is protected by the asset, the interest rate is lower than an unsecured loan, and at the same time, the lender of the loan feels safe.
On the other hand, an unsecured loan is a loan that doesn’t have any protection. That’s why the risk inherentRisk InherentInherent Risk is the probability of a defect in the financial statement due to error, omission or misstatement identified during a financial audit. Such a risk arises because of certain factors which are beyond the internal control of the organization. in the loan gets enhanced. And as a result, the interest rate of the unsecured loan is higher than the secured loan.
Secured Loan vs. Unsecured Loan Infographics
Let’s see the top differences between secured vs. unsecured loans along with infographics.
- The biggest difference is that in the case of a secured loan, one needs to keep collateral against the loan, and in the case of an unsecured loan, this is not the case.
- In the case of a secured loan, the interest rate is lower since the borrower keeps one of her assets as collateral. In the case of an unsecured loan, the interest rate is higher since there’s no collateral given for the loan.
- In the case of a secured loan, the loan amount is huge. In the case of an unsecured loan, the loan amount is smaller than a secured loan.
- In the case of a secured loan, the lender has a lower risk, and the borrower has more risk. In the case of an unsecured loan, the equation is completely different – in this case, the lender has more risk through the borrower needs to pay more interest on the loan.
- Examples of secured loans are housing loans, car loans, auto loans, etc. Examples of unsecured loans are personal loans, educational loans, credit card loans, etc.
Secured vs. Unsecured Loan Comparative Table
|Basis for Comparison||Secured Loan||Unsecured Loan|
|Meaning||It is a loan protected by an asset/equipment.||An unsecured loan isn’t protected by an asset.|
|Usage of lien||Yes.||No.|
|Status of borrower||He has more risk because if the borrower isn’t able to pay off the loan, the asset would be taken off from him.||It has a lower risk, but interest is higher.|
|Status of lender||It has a lower risk because the lender can claim the asset if the borrower isn’t able to pay off the loan.||It has more risk because the loan isn’t protected.|
|Amount of loan||Much higher than an unsecured loan.||Much lower than a secured loan.|
|Example||Housing loan, car loan.||Credit cards, personal loans.|
Both loans are taken in different circumstances. If a business takes a secured loan, it needs the money immediately; otherwise, it would not think of taking a secured loan because the business needs to keep an asset against the loan. This is the same as an individual if he wants to take a housing loan or car loan. But in the case of an unsecured loan, a business or an individual can take any time since there’s no collateral involved.
This has been a guide to Secured Loan vs. Unsecured Loan. Here we discuss the top differences between these loans along with infographics and a comparative table. You may also have a look at the following articles on accounting to learn more about fixed income.