Unsecured loans do not require you to mortgage any property to the bank, while secured loans do. Banks would always want to reduce their risk—if tomorrow you do not pay back the loan, the bank would recover the amount by selling off your property. For takers of secured loans, interest rates are lower than unsecured loans. As an example, Kotak Mahindra Bank offers personal loan at 14% for less risky customers and loan against property for only self-employed professionals at around 11%. Unsecured loans are always expensive in comparison. But other than the cost consideration, you should look at other aspects. The choice becomes tougher due to the fact that the disadvantages of one are countered by the other.
If your credit history is strong enough
If you have been paying your loans in a disciplined manner, you would get an unsecured loan at almost an equal interest rate as a secured loan. Why would you then want to offer security for what you are getting unsecured? Access your credit report before applying for a loan and check for the score. You can get into a negotiation with the bank, for your credit history is your strongest support.
If your take-home salary is high
Even if the interest rates of secured loans are lower, the total repayment amount could be much larger due to the tenure being higher. Therefore if your take-home is high and you can afford large equated monthly installments (EMIs), go for unsecured loans. For example, if the principal amount is Rs. 2 lakh and the interest rate is 13%, the total repayment for a tenure of three years is Rs. 242,596 while for a tenure of six years, it is Rs. 289,067. Notice the additional Rs. 46,471 that you would be required to pay if the tenure increases by three years although the EMI comes down to Rs. 4,014 from Rs. 6,738 with increasing tenure.
To save property from mortgage
If you wish to preserve your equity in your property, it is better to go in for unsecured loans. That would help you get a secured loan in future in times of emergency even if your unsecured loan is ongoing. But the opposite is highly unlikely—you will not be able to get unsecured loans easily in times of emergency even if your previous loan is secured.
For faster credit in emergency
When you need money in emergency, unsecured loans are a much better option since they involve lesser paperwork and thus you get your money quicker. Secured loans, on the other hand, involve verification and valuation of the security provided and creating assignment to the bank, which is a painful and a long-drawn procedure.
Other than the interest rates that are higher, both secured and unsecured loans are governed by nearly the same terms and conditions. So, if you are comfortable enough with higher EMIs, it better to opt for an unsecured loan with shorter tenure because you will win in terms of the total outflow as well as property free of external hold.