Definition
Secured vs Unsecured Loan
A secured loan is backed by collateral the lender can seize on default; an unsecured loan has no collateral and relies on your creditworthiness.
A secured loan is backed by an asset — a home loan (the property), a gold loan (gold), or a loan against an FD or property. Because the lender can recover its money by selling the collateral, secured loans carry lower interest rates and larger amounts.
An unsecured loan, like a personal loan or credit card borrowing, has no collateral, so the lender relies on your income and credit score. These carry higher interest rates and stricter eligibility, but disburse fast with minimal paperwork.
Defaulting on a secured loan risks losing the pledged asset, while defaulting on an unsecured loan severely damages your credit score and can lead to legal recovery. Choose based on cost, urgency and what you are comfortable pledging.
Related terms
- Loan-to-Value (LTV) RatioLTV is the proportion of an asset's value that a lender is willing to finance through a loan.
- Personal LoanA personal loan is an unsecured loan for any personal need, sanctioned mainly on the basis of your income and credit score.
- Gold LoanA gold loan is a secured loan where you pledge gold jewellery or coins as collateral to borrow money quickly.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.