What is an unsecured loan?
An unsecured loan is a loan that does not require you to pledge any assets. Instead, lenders assess your credit score, income level, job stability, and existing debts before deciding whether to approve your application. Because there is no collateral involved, lenders face higher risk. This is why unsecured loans typically have higher interest rates, lower borrowing limits, and shorter repayment periods compared to secured loans.
Key features of unsecured loans:
No collateral required – You do not need to pledge any property or asset.
Higher interest rates – As the lender takes more risk, they charge more interest.
Lower loan limits – You can usually borrow less than what you could with a secured loan.
Shorter tenure – The repayment period is generally shorter, which increases monthly EMIs.
Credit score is crucial – A poor credit score can reduce your chances of approval or lead to less favourable terms.
This type of loan is suitable for smaller or emergency needs such as medical bills, wedding expenses, or a holiday. It’s also a go-to option for those who don’t own assets to pledge.
Key differences between secured and unsecured loans
Here is a quick comparison to help you understand the secured loan vs unsecured loan discussion clearly:
Aspect
|
Secured loan
|
Unsecured loan
|
Collateral
|
Required
|
Not required
|
Loan amount
|
Higher
|
Lower
|
Interest rate
|
Lower
|
Higher
|
Repayment period
|
Longer
|
Shorter
|
Risk
|
You may lose the asset if you default
|
You won’t lose an asset, but your credit score will take a hit
|
Approval criteria
|
Based on asset value
|
Based on income and credit score
|
Processing time
|
Slightly longer (due to asset valuation)
|
Faster
|
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Advantages and disadvantages of secured loans
Pros:
Lower interest rates – Makes long-term borrowing more affordable.
Larger loan amounts – Ideal for big purchases like a house, higher education, or business expansion.
Flexible repayment – Longer tenures make EMIs more manageable.
Easier approval – Especially if you don’t have a strong credit history.
Cons:
You must own assets – Not everyone has property or investments to pledge.
Risk of asset loss – If you do not repay, your collateral may be seized.
Approval may take longer – Lenders need time to assess the asset value.
Advantages and disadvantages of unsecured loans
Pros:
Quick disbursement – Ideal for urgent needs like hospital bills or emergency travel.
No collateral needed – No risk of losing property or shares.
Simple documentation – Requires less paperwork.
Cons:
Higher interest rates – Can be expensive over time.
Lower loan amounts – May not be enough for big expenses.
Tougher approval – A weak credit score can limit your options.
Common types of secured and unsecured loans
Let us look at the most popular options under each category.
Secured loans:
Home loans – Used to buy or build a house. The property is the collateral.
Car loans – Secured against the car being purchased.
Loan against property – Use your home or land to raise funds.
Gold loans – Borrow against the value of your gold ornaments.
Loan against securities – Pledge your shares, bonds, or mutual funds for instant capital.
Unsecured loans:
Personal loans – Can be used for anything medical expenses, travel, weddings, etc.
Credit card loans – Short-term loans based on your card limit.
Education loans – Some are unsecured, especially if the loan amount is small.
Business loans – For short-term capital without pledging assets.
Which one should you choose?
There is no one-size-fits-all answer to the secured vs unsecured loan debate. Your choice should depend on your current financial health, the urgency of your need, and whether you own assets.
Choose a secured loan if:
You need a large loan with lower interest.
You’re buying a house or vehicle.
You have investments or property to pledge.
You have a poor credit score and need easier approval.
Choose an unsecured loan if:
You need money quickly.
You don’t want to risk your assets.
Your need is short-term, and the amount is small.
You have a good credit score and stable income.
Final thoughts
Understanding the difference between secured and unsecured loan can help you make better financial decisions. Secured loans are ideal when you need large sums at lower interest rates and have assets to pledge. Unsecured loans work well for smaller, short-term needs when you don't want to risk losing anything. And if you are someone with investments in shares, bonds, or mutual funds, why sell them? Use a loan against securities to access funds while letting your investments grow.
Still unsure which one suits you? If you want funds without selling your investments, a loan against securities gives you the perfect middle path. Apply now
