Collateral vs. Non-Collateral Loans: What You Need to Know

Understand the key differences between collateral and non-collateral loans. Learn which option suits your financial needs, focusing on security requirements and interest rates. Make informed borrowing decisions.
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3 mins read
18-June-2025

When exploring loan options, one of the first decisions you will face is whether to go for a collateral or non-collateral loan. The choice you make can affect everything from how much you pay in interest to how quickly your loan is approved. That’s why it’s important to understand the pros and cons of each. Whether you're funding higher education, planning a major purchase, or need quick cash in an emergency, choosing the right loan type helps you borrow smarter.

Want to avail funds without selling your investments? Explore a smarter option with Loan Against Securities.

This guide simplifies the differences between collateral and non-collateral loans and introduces an ideal option for those with investments who want fast access to funds.

What is a collateral loan?

A collateral loan is one where you pledge an asset like property, gold, mutual funds, shares, or insurance policies to get a loan. Because there’s something valuable backing your loan, lenders consider it lower-risk. That’s why they often offer:

  • Lower interest rates
  • Higher loan amounts
  • Flexible repayment options
  • Longer repayment tenure

In case of default, the lender has the right to sell the pledged asset to recover the dues. But if you’re confident about repaying on time, collateral loans can be highly cost-effective.

Common examples of collateral loans:

  • Loan Against Property (LAP)
  • Loan Against Insurance Policy (LAIP)
  • Loan Against Shares (LAS)
  • Loan Against Bonds (LAB)
  • Loan Against Mutual Funds (LAMF)

Have mutual funds or shares? You could access liquidity quickly without selling them. Apply now

What is a non-collateral loan?

A non-collateral loan (also known as an unsecured loan) doesn’t require you to pledge any asset. Instead, lenders look at your credit score, income, job stability, and repayment history to decide if you qualify.

These loans are often:

  • Easier to get if you have a good credit score
  • Faster to process (sometimes within 24-48 hours)
  • Suitable for smaller amounts and short-term needs

However, they also tend to have:

  • Higher interest rates
  • Shorter tenure
  • Lower loan amounts

Examples of non-collateral loans:

  • Personal loan
  • Credit card loans
  • Consumer durable loans

Key differences between collateral and non-collateral loans

Here’s a simple comparison to help you decide:

Feature

Collateral loan

Non-collateral loan

Asset required?

Yes

No

Risk to borrower

Asset may be seized on default

No asset risk but credit score takes a hit

Interest rate

Lower

Higher

Approval time

Moderate (asset valuation needed)

Faster (profile-based)

Loan limit

Higher (can go up to Rs. 1000 Cr)

Lower (Rs. 50,000 – Rs. 10 lakh)

Repayment terms

Flexible, longer tenure

Fixed EMIs, shorter tenure

Eligibility

Based on asset value

Based on credit profile


Want the affordability of a secured loan and the speed of an unsecured one? A Loan Against Securities gives you both.

Loan Against Shares
Loan Against Mutual Funds

Factors influencing choice between collateral and non-collateral loans

Choosing the right loan depends on your financial situation and goals. Here are a few things to consider:

1. Purpose of the loan

  • Business expansion, education, or large expenses? A collateral loan may be better.
  • Urgent short-term needs? Unsecured or LAS loans can work well.

2. Ownership of valuable assets

  • If you already own property, gold, or investments, secured loans are easier and cheaper to get.

3. Urgency and approval speed

  • Unsecured loans are faster, but LAS can now be disbursed digitally in as little as 24 hours.

4. Cost of borrowing

  • Unsecured loans can cost 13–24% p.a.
  • LAS loans start around 8–15% p.a. a huge saving over time.

5. Repayment comfort

  • LAS gives you a credit line you pay interest only on what you use, not the full amount.

When to consider a collateral loan?

Collateral loans are ideal if:

  • You need a large amount (Rs. 10 lakh or more)
  • You want lower interest costs
  • You own valuable assets that you can temporarily pledge
  • You’re okay with slightly longer processing times

Common use cases:

  • Buying or building a house
  • Business expansion
  • Overseas education
  • Consolidating expensive debts

When to consider a non-collateral loan?

Choose unsecured loans if:

  • You do not have assets to pledge
  • Your need is urgent and small
  • You have a solid credit history
  • You’re comfortable paying higher EMIs

Use cases include:

  • Emergency medical expenses
  • Wedding or travel
  • Gadget or appliance purchases
  • Short-term relocation

Facing rejections due to credit score? If you have got shares, mutual funds or insurance, Loan Against Securities may still get you funded. Apply now

Why loan against securities is the smarter middle ground

A Loan Against Securities (LAS) offers the affordability of a secured loan and the speed of an unsecured one. It’s becoming a go-to choice for high-net-worth individuals and savvy investors who need liquidity without giving up control of their investments.

Here’s why LAS makes sense:

  1. Keep your investments, borrow on top, your funds stay invested, continue earning returns.
  2. Pay interest only on what you use Rs. 1 lakh today, Rs. 50,000 later interest applies only to the used amount.
  3. Withdraw again and again, it’s a revolving credit withdraw, repay, reuse within limits.
  4. Fully digital process, no branch visits. Instant online pledge. Fast disbursal in 24–48 hours.

Conclusion

Knowing the difference between collateral and non-collateral loans helps you pick smarter. If you’re looking for quick funds at low cost without selling your investments a loan against securities is your ideal choice. It combines low interest, high flexibility, and instant approval.

Let your shares and funds do more than just sit in your portfolio. With Loan Against Securities, you borrow without selling, apply without waiting, and grow without compromise.

Frequently asked questions

What is an example of a non-collateral loan?
An example of a non-collateral loan is a personal loan. These loans are granted based on the borrower's creditworthiness and income without requiring any asset as security.

Which loan should I choose—collateral or non-collateral?

Choose a collateral loan for larger amounts and lower interest rates if you can pledge assets. Opt for a non-collateral loan for quicker approval and flexibility, especially if you lack suitable security.

Can I convert a non-collateral loan into a collateral loan?

In most cases, non-collateral loans cannot be converted into collateral loans mid-term. However, you may be able to refinance with a new collateral-backed loan, depending on the lender’s policies and your financial profile.

What types of loans are typically collateral-based or non-collateral-based?

Collateral-based loans include home loans, loan against property, and gold loans. Non-collateral loans commonly include personal loans, education loans (for certain courses), and credit cards, which don’t require pledged assets.

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