Loans are of 2 types one is secured and other is unsecured, in order to understand both of them better one should look at the difference between secured and unsecured loans –
- Security – While taking secured debt one needs to put security like land, building, plant and machinery in favor of creditor and then he or she can take the debt whereas in case of unsecured debt there is no such requirement of putting security in favor of creditor.
- Rate of Interest – The rate of interest which the debtor has to give to creditor is lower in case of secured debt because of the assets of borrower act as securities, while unsecured debt have higher rate of interest because they are risky as their is no asset of borrower with creditor and in order to compensate for that creditors charge higher rate of interest.
- Amount – In case of secured debt one can get higher amount of debt because of security whereas in case of unsecured debt amount is lower as lenders are unwilling to risk too much amount without having the security.
- Ease – A secured loan is much easier to get as you have the assets which can you can give to the lender and get the loan while unsecured loans are very difficult to get as creditors put stringent measures before giving the debt.
- Example – Examples of secured loans are car and home loan, while examples of unsecured loans are credit card, bank overdraft and personal loan.