When it comes to borrowing money, individuals and businesses have several options to meet their financial needs. Secured loans and unsecured loans are two popular lending categories. These loans vary significantly in terms of requirements, risk, and interest rates. Let’s explore the key aspects of both loan types and their basis in India!
All About Secured Loans
Secured loans are supported by collateral, valuable assets like real estate or vehicles. If the borrower defaults, the lender has the authority to seize the collateral. Due to this security, secured loans have lower interest rates than unsecured loans.
In India, secured loans are prevalent in various sectors, including home loans, auto loans, and loans against property (LAP). Home loans are secured by the property being purchased, while auto loans use the vehicle as collateral. LAP allows borrowers to use their property to obtain funds for various purposes, making it a popular choice for business owners and individuals looking for substantial funds.
Amitabh Chaudhry, the CEO & MD of Axis Bank, noted that home loans, loans against property, and auto loans hold the top positions in the secured loans segment, accounting for 65% of contributions during H1FY21. This trend began with the onset of the pandemic and remains significant today. He also mentioned that after Diwali, there is typically a cooling down period for a couple of weeks, but NBFCs anticipate a surge in business during the holiday season.
All About Unsecured Loans
Unsecured loans, as opposed to secured loans, do not require any security. Instead, they are approved based on the borrower’s creditworthiness and financial standing. Since lenders bear a higher risk in granting unsecured loans, interest rates are generally higher compared to secured loans. Unsecured loans have gained significant popularity in India, especially among salaried individuals and small business owners.
One of the standout features of an unsecured business loan is that business owners can utilize the loan amount to consolidate multiple ongoing debts and repay them. In some cases, this enables them to retrieve their tangible collaterals from multiple lenders.
Now, what about business owners who are unwilling to relinquish any equity in their company for a small sum of capital? Well, the perfect solution for such a requirement is a Business Loan. As explained by Poonawalla Fincorp’s MD Abhay Bhutada, a business loan is a credit offering designed to provide capital funding to business owners without the need to pledge collateral with the lender. The entire process, from submitting the loan query online to application and disbursement, is completely digital and paperless.
On the contrary, according to Harshvardhan Lunia, the loans provided by Lendingkart are unsecured in nature. He did, however, point out that as they support the priority sector, many of these loans are backed by safety nets provided by several central government programs, such as the Credit Guarantee Fund for Micro Units and Credit Guarantee Fund Trust for Micro and Small Enterprises.
In a country like India, borrowers must thoroughly assess their financial situation, the loan’s purpose, and their capacity to fulfill repayment obligations before choosing between the two options. Regardless of whether one goes for a secured or unsecured loan, responsible borrowing, and prudent financial planning play a pivotal role in maintaining a sound and healthy financial life.