Digitalization of banking and easy access to loans have changed the whole dynamic of borrowing in India. People tend to borrow from various channels without analyzing the risk, terms, and conditions of borrowing. Due to a lack of financial knowledge, many people borrow from non-registered NBFCs, which puts them in a difficult position. Many people do not even know the basics like types of debt and the options available.
When it comes to available options, there are two types of debt- secured and unsecured.
A debt secured by collateral, asset, or security to ensure debt repayment in time is called a secured debt. The borrower assures collateral for the loan. If you do not pay the loan in time, the lender has the right to liquidate that asset to recover the amount owed to them. To name the collaterals, you can keep home, automobiles, stocks, valuable metals, bonds, and more.
Examples of secured debts are mortgages, automobile loans, secured education, secured business loans.
Unsecured debt is the debt in which collateral is not mandatory to get the loan. Even though these loans are available quickly, the lender lends the money on certain conditions. The borrower decides to sanction the loan after analysing five factors: Character, Capacity, Capital, Collateral, and Conditions. These things consist of credit score, employment history, income, total active debts, personal assets, and loan term.
Examples of unsecured debts are credit cards, personal loans, business loans, consumer loans, payday loans, education loans.
What are the differences between them?
The differences between unsecured and secured debts are:
- Payment term: Secured debts are often given for an extended period, whereas you have to pay the unsecured debts with a specific period depending on the owed amount.
- Interest rate: The interest rate for secured debt is often less, whereas unsecured debt has a higher interest rate. Only registered banking and non-banking financial institutions offer secured debt, whereas unsecured debts are available from local lenders.
- Collateral: The most common difference between secured and unsecured debts is collateral. Unlike unsecured debts, secured debts require collateral in property, stocks, bonds, valuable metals, or automobiles.
- Conditions: For unsecured debts, there are specific criteria to finalize whether the borrower qualifies for it or not. In the case of secured debt, the borrower has to present some form of collateral.
- Tax saving: The interest rate, for some secured debts, is tax-deductible that saves you more money, unlike unsecured debt.
There are different types of debt, but which one is better for you?
Technically and rationally, secured debts are always a better option than unsecured debts. As the interest rates are lower for secured debts, you end up paying less in interest. Moreover, going for a secured debt also has a positive effect on your credit score. The only downside here is that you will have to keep something as collateral. You can secure your debt by keeping your valuables as collateral. The collaterals can be home, automobile, stocks, gold, and bonds.
Is it becoming difficult to manage your debts?
Debts can be difficult to manage. You don’t realize when they go overboard, and you end up in a debt trap. If you are in such a situation and need help with your debts, we will help you. Freed is India’s first comprehensive debt management company; we aim to help our clients break free from debt chains and live a financially secure life. You can reach out to our trained debt counsellors who would pave the way toward a debt-free life for you.
Do you want to know more?
Drop your details on our website to get a callback or call us on 01246663666 to resolve your debts. Our debt counselors will explain to you the available options and help you find whether debt settlement is the right option for you as per your current circumstances.