What are secured and unsecured loans?


There are 2 types of loans secured and unsecured. Both types have their characteristics and are very different in their nature

The main factor which distinguishes them both is the presence of collateral in the contract. While taking a loan it is important to know whether collateral is required or not. If your loan is backed by collateral then it is a secured loan.

Now, what is collateral?

Collateral is security that is required to obtain a loan. It is the reason why secured loans are termed as secured as they are backed by collateral security.

Security which is offered by the borrower to the lender determines the amount of loan to be granted to the borrower.

Secured loan in detail:

A secured loan is a loan that is secured by a security which is generally an asset. This type of loan gives assurance to the lender about the repayment capacity of the borrower. Hence, secured loans are generally easy to acquire as compared to unsecured loans.

In secured loans, the collateral against which the loan amount is decided is very important. It can be home, gold, or any other asset. In such loans, the ownership deed of the asset offered as security is held by the bank or the lender till the time loan is repaid in full.

Thus, the ownership deed of the security plays an important role in deciding whether you will get the loan or not.

Unsecured loans in detail:

Unsecured loans are loans that do not involve any security from the borrower and are granted by banks and institutions on an understanding basis with only a few documents that can confirm the credibility of the borrower.

These loans are generally little procedure based and can take time for approval.

There are some important factors to be considered when you want such loans:

  • A good repayment history
  • Credit score should be as per CIBIL ratings
  • All the documents should be legitimate.
  • Employment status should match eligibility.
  • Eligibility criteria should be met.

These factors decide whether you will get a loan of unsecured nature or not.

Some of the unsecured loans i.e. loans with no collateral are personal loans, credit cards, education loans, etc.

Key highlights:

  1. The collateral forms the basis for deciding whether the loan is personal or not.
  2. The interest on the loan will be decided based on the nature of the loan.
  3. Generally, the interest on secured loans is lesser compared to other loans as they are backed by collateral.