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
23-April-2025

When exploring loan options, one of the first decisions you'll face is whether to opt for a collateral or non-collateral loan. Understanding the difference between the two is crucial, as it impacts everything from interest rates and loan approval time to the level of risk involved. In this article, we’ll break down the key aspects of a collateral vs non collateral loan, helping you determine which type aligns best with your financial goals. Whether you're planning a big purchase, funding your education, or managing unforeseen expenses, knowing your options can lead to smarter, more secure borrowing choices.

Financial decisions are not just about numbers, they are about confidence. Whether you are planning for a child’s overseas education, investing in a business expansion, or covering an emergency, choosing the right type of loan is the first step toward financial clarity.

This guide breaks down everything you need to know about collateral vs. non-collateral loans and introduces a smarter, low-cost solution for those who already have a strong investment portfolio.

What is a collateral loan?

A collateral loan is a type of credit that requires you to pledge an asset. This could be real estate, gold, insurance policies, shares, mutual funds, or other high-value holdings. Since you are offering something tangible, lenders consider these loans less risky and offer:

  • Lower interest rates
  • Higher approval chances
  • Flexible repayment options
  • Longer tenures

Because the lender has a backup in case of default, you also get a better deal as a borrower.

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)

If you have invested in mutual funds, shares, or insurance policies, you are already sitting on potential liquidity. With loan against securities you can get funds at competitive rates with zero impact on your ownership. Apply now

What is a non-collateral loan?

Non-collateral loans, or unsecured loans, do not require you to pledge any assets. Approval depends primarily on your creditworthiness, which includes:

  • CIBIL score
  • Income stability
  • Repayment track record

Because the lender assumes more risk, these loans often come with:

  • Higher interest rates
  • Stricter eligibility norms
  • Lower loan amounts
  • Shorter tenures

Still, they are preferred when speed is essential, and assets are unavailable.

Examples of non-collateral loans:

  • Personal loan
  • Credit card loans
  • Consumer durable loan

Though quick, non-collateral loans can be expensive.

For short-term needs, consider leveraging your investments instead without high EMIs or lengthy paperwork. Apply now

Key differences between collateral and non-collateral loans

Let’s simplify this comparison through a table:

Feature

Collateral loan

Non-collateral loan

Asset required?

Yes

No

Risk to borrower

Asset may be seized if defaulted

No asset risk, but credit score suffers

Interest rate

Lower

Higher

Approval time

Moderate (depends on asset valuation)

Quick (based on profile)

Loan limit

Higher (up to Rs.1000 crores in some cases)

Usually lower (Rs.50K to Rs.10 lakhs)

Repayment

Flexible, longer tenures

Shorter tenures, fixed EMIs

Eligibility

Depends more on asset

Heavily credit-score dependent


Want the affordability of a collateral loan and the speed of a personal loan? A Loan Against Shares or Mutual Funds can offer the best of both—especially when urgency meets opportunity. 

Loan Against Shares
Loan Against Mutual Funds

Factors influencing choice between collateral and non-collateral loans

Every borrower is different. So here are the key factors to consider when choosing your ideal loan type:

1. Purpose of the loan

Planning a business expansion? Need cash for a wedding? Want to fund overseas education? The reason behind borrowing will directly impact your choice.

  • High-ticket, long-term goals - Collateral loans (e.g., property, business)
  • Quick, short-term needs - Non-collateral or flexible options like loan against securities.

2. Ownership of valuable assets

Have gold, property, or market investments? Then collateral loans become accessible and affordable.

3. Urgency and approval speed

Non-collateral loans often get sanctioned within 24–48 hours, especially if you are salaried and have a high credit score. But today, even collateral-based LAS loans can be approved online within hours.

3. Cost of borrowing

Interest rates on unsecured loans can range from 13% to 24% p.a., while secured loans, especially LAS start at around 8%–15% p.a.. Over a longer tenure, this rate difference can save you lakhs.

4. Repayment comfort

Do you prefer paying in fixed EMIs, or would you rather pay interest only on what you use? LAS works like an overdraft, pay less when you borrow less.

When to consider a collateral loan?

Opt for collateral loans when:

  • You need a large loan amount (Rs. 10L and above)
  • You want to pay lower interest rates
  • You have valuable assets you can temporarily pledge
  • You are okay with slightly longer processing (for property-based loans)

Use cases:

  • Buying/constructing a home
  • Business investments or expansion
  • Funding international education
  • Consolidating high-interest debts

When to consider a non-collateral loan?

Unsecured loans are suitable when:

  • You do not have assets to offer
  • Your need is urgent and short-term
  • You have a strong credit history
  • You can afford higher interest EMIs

Common examples:

  • Emergency hospital bills
  • Marriage or travel
  • Laptop, phone, or gadget purchases
  • Relocation costs

However, if your credit score is below 700 or your income is variable, approval might be delayed or interest might be higher.

Loan approvals getting stuck? If you’ve got investments, you may not need a great credit score to get funded. Check applicable interest rates for your loan

Why loan against securities is the smarter middle ground?

If collateral feels complex and unsecured loans feel costly, Loan Against Securities (LAS) can be the best of both worlds. Here’s why more individuals, especially high-net-worth investors are switching to LAS:

1. Own your investments, borrow against them

Your mutual funds, shares, and even insurance policies continue to earn returns while you borrow.

2. Pay interest only on what you use

You can borrow Rs.1 lakh today, Rs.50,000 next week and pay interest only on used limits.

3. Withdraw multiple times

It's a revolving line of credit withdraw, repay, and withdraw again within the sanctioned limit.

4. End-to-end digital

No branch visits. No long forms. Instant eligibility check, online pledge, and disbursal within 24-48 hours.

Grow your future, fund your present. Tap into your investments and access funds which are fast, secure, and investment-friendly. Apply now

Conclusion

Understanding the difference between collateral and non-collateral loans helps you align financing with your goals. If you want low-cost, flexible credit without selling your investments, loan against securities offers the perfect middle path which is quick, digital, and cost-effective.

Your shares can do more than just grow wealth, they can solve liquidity problems instantly. Leverage your portfolio without letting go of ownership. With Bajaj Finserv’s Loan Against Securities, you are not borrowing, you are making your portfolio work smarter for your present needs.

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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