Fixed Income Tutorials
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- Secured vs Unsecured Loan
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Differences Between Secured Loan vs Unsecured Loan
Secured loan and unsecured loan differ especially on one condition – one is protected by an asset and another isn’t protected. But this is not the only difference between secured and unsecured loan.
A secured loan is a loan which is usually given on a lien. It is protected by an asset/equipment. As an example, we can say that secured loan 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 which doesn’t have any protection. That’s why the risk inherent in the loan gets enhanced. And as a result, the interest rate of the unsecured loan is higher than the secured loan.
Let’s get started with the head to head differences and then we will go to the meat of understanding these two in detail.
Secured Loan vs Unsecured Loan Infographics
As you can see, there are some differences between secured loan vs unsecured loan. Here are the most important ones mentioned below –
Secured Loan vs Unsecured Loan – Key differences
There are many differences between a secured loan vs unsecured loan. Here are the key differences between them –
- The biggest difference between a secured loan and unsecured loan is that in the case of 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 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 Loan vs Unsecured Loan (Comparison Table)
|Basis for Comparison of secured vs unsecured loan||Secured Loan||Unsecured Loan|
|1. Meaning||Secured loan is a loan protected by an asset/equipment.||An unsecured loan isn’t protected by an asset.|
|2. Usage of lien||Yes.||No.|
|3. Interest rate||Lower.||Higher.|
|4. Status of borrower||Has more risk because if the borrower isn’t able to pay off the loan, the asset would be taken off from him.||Has lower risk, but interest is higher.|
|5. Status of lender||Has lower risk because the lender can claim the asset if the borrower isn’t able to pay off the loan.||Has more risk because the loan isn’t protected.|
|6. Amount of loan||Much higher than unsecured loan.||Much lower than secured loan.|
|7. Example||Housing loan, car loan.||Credit cards, personal loan.|
Secured loans and unsecured 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 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 differences between secured loans vs unsecured loans, its examples, and infographics along with comparison table. You may also have a look at the following articles on accounting to learn more about fixed income.