What are the differences between secured and unsecured loans?

2 min read

Secured and unsecured loans are types of financing offered by banks and non-banking finance companies to help customers meet their financial needs. Here’s a look at some of the key differences between the two:

What are secured loans?

Lenders sanction a secured loan when you pledge an asset as collateral, which acts as security. For instance, you can pledge your house or plot, gold, a vehicle, securities or fixed deposits as collateral.

Secured loans include mortgage loans, gold loans, loans against fixed deposits, vehicle loans and loans against securities. However, remember that your lender can seize and liquidate the asset if you default on a secured loan to recover the outstanding debt.

What are unsecured loans?

Unsecured loans do not require you to pledge any collateral. Lenders scrutinise your credit score to ensure that you have a good repayment history. Maintaining a credit score of 685 or higher is critical to availing an unsecured loan. In case of a default, your credit score will drop.

The two types of popular unsecured loans include:

  1. Personal loan
  2. Business loan

Difference between a secured and an unsecured loan

A secured loan requires collateral, such as a home or car, which the lender can seize if the borrower defaults. This collateral reduces the lender's risk, leading to lower interest rates and higher loan amounts. In contrast, an unsecured loan doesn't require collateral but relies solely on the borrower's creditworthiness. Because of the higher risk to lenders, unsecured loans typically have higher interest rates and lower loan amounts. Secured loans are suitable for larger expenses or borrowers with lower credit scores, while unsecured loans are ideal for smaller expenses or those with strong credit histories.

To apply for a Bajaj Finserv Personal Loan, fill in your details on the online application form, select the loan amount and tenor that suits you, submit the relevant documents and get the money in your bank account within 24 hours* of approval.

*Conditions apply

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Frequently asked questions

What is the unsecured term debt?

Unsecured term debt is a loan not backed by collateral, relying solely on the borrower's creditworthiness. It's typically repaid in regular instalments over a fixed period.

Is unsecured debt risky?

Unsecured debt can be risky as lenders have no collateral to recover losses if the borrower defaults, leading to higher interest rates and stricter borrowing criteria.

What is an unsecured loan example?

An unsecured loan example includes personal loans, credit cards, and student loans, where borrowers receive funds based on creditworthiness without pledging collateral.

What is the limit of unsecured loans?

The limit of an unsecured loan varies based on factors like the borrower's credit history, income, and the lender's policies.