The difference between secured and unsecured two-wheeler loans

Thinking of applying for a two-wheeler loan to purchase a motorcycle? Commuting becomes breezy when you have a bike to navigate to different parts of the city. If you aren’t willing to disturb your savings, it’s logical to settle for this financial privilege. 

Leading banks and NBFCs offer loan benefits to borrowers interested in purchasing two-wheelers. Now, you might be wondering whether you should take a secured loan or an unsecured loan to finance your motorcycle. In this article, we have explained this loan difference to you. Besides, we have recommended the best type of loan to finance your purchase.

Understanding the difference between secured and unsecured two-wheeler loans

Let’s take a look at the differences between secured and unsecured loans to purchase your two-wheeler.

Secured two-wheeler loans

A secured loan to purchase your two-wheeler involves a collateral. This is a security, against which the lender would provide you with the loan. Considering the risks of lending a two-wheeler loan to you, the creditor would ask for a tangible security. In case you fail to repay the loan, the lender reserves the right to forfeit the collateral.

In case of a motorcycle loan, the bike or scooter you purchase serves as the collateral. With a secured loan to purchase your two-wheeler, you can enjoy a lower rate of interest. This is because, the lender has a security in the form of your motorcycle. Failing to respect the loan repayment terms would lead to the forfeiting of the bike.

Unsecured two-wheeler loans

With an unsecured loan to purchase your two-wheeler, the lender wouldn’t ask you for any tangible security for providing you with the financial privilege. In this case, the creditor evaluates your credit score to get an idea about your financial stature. Once they are confident about your repayment ability, they process the loan. 

So, you don’t need any collateral or security when you take an unsecured loan from a bank or NBFC. This puts the lender to a greater risk of non-repayment from your end. As a result, unsecured loans involve higher rates of interest. The lender would assess your monthly income, job or business stability, and the consistency of cash flow before giving the loan approval.

5 ways in which secured two-wheeler loans are different from unsecured loans

• The most visible difference between secured loan and unsecured loan to purchase a two-wheeler is the involvement of a collateral. You need to have an asset, like the motorcycle, in order to obtain a secured loan. Unsecured loan, on the other hand, gets processed on the basis of your financial stature and credit score.
• The interest rates also constitute a prime difference between secured and unsecured loans. For secured loans, the interest rate is lower due to the presence of the collateral. Your risk profile significantly decreases when you settle for a secured loan for two-wheelers.
• The loan approval rate is higher for secure loans. Lenders evaluate the necessary loan documents in both the cases. However, the approval process is less stringent for secure loans compared to unsecured motorcycle loans.
• The loan repayment terms are more lenient for secure loans. Besides, the loan tenures tend to be longer in these cases. The contract for secure loans is often more favourable for the borrowers.
• Even if your credit score looks tarnished, some banks or NBFCs might provide you with secure loans. However, if you have some red flags on your credit report, it might be challenging to obtain an unsecure loan. So, in terms of loan eligibility, secure loans would be a smarter pick.

How to decide the loan type to go for?

Now that you are wondering the type of loan that you should apply for, here are some crucial aspects to consider.

   1. Credit score

Reputed lenders would check your credit score before approving your two-wheeler loan. So, if your score is above 650, you can qualify for both secured and unsecured loans for purchasing your motorcycle. However, if you need a personal loan to finance 100% of your loan, your lender might look for a credit score above 720.

   2. Interest rate

Of course, you would be seeking a low-interest two-wheeler loan. This requires you to go for a secured loan, as the interest rate would be lower. However, if you want to settle for a personal loan to finance the purchase completely, be prepared to shell out a higher interest rate.

   3. Processing charges

Banks and NBFCs charge a processing fee for both secured loans and unsecured loans. Compare this fee for both these types of loans. Typically, lenders charge a specific amount or a percentage of the loan amount as processing fee. Calculate the overall amount you would be repaying after factoring in the processing charges into your calculation.

Should you apply for a secured loan or an unsecured loan?

We have discussed both secured and unsecured loans in this article for your convenience. Now, if you are to decide between these two types of loans, it would be logical to settle for a secured loan.

Considering the loan benefits, you would enjoy a better financial ease with secured loans. Firstly, the interest rate would be lower for these loans. Also, you can get a longer time to repay the loans. Even if you don’t have a sound credit score, you can qualify for a secured loan.

Based on your loan requirements, you can also vouch for a personal loan to purchase your two-wheeler. In case you don’t have instant cash to pay a down payment of minimum 20% for the two-wheeler, you can go for a personal loan. However, if your credit score looks tarnished, it might be challenging to obtain a personal loan since it’s unsecured. 

We have talked about both the loan types for your understanding. So, if you get an offer for pre-approved motorcycle loan from your bank, it would be wise to accept the offer.