Are personal loans secured or unsecured? Here’s what you should know
Personal loans in the country are mainly unsecured, though secured options exist. This article outlines key differences, interest rates, eligibility, and risks to help borrowers make informed credit decisions.
A rising number of borrowers in the country are opting for personal loans, amid high consumption demand and rapidly evolving liquidity conditions. Even according to the latest sectoral deployment of bank credit report of April 2025 by RBI, loans to the personal segment that includes credit card dues, housing, education along with other loans have maintained a reasonably steady growth trajectory.
Still, it has been seen that many borrowers remain unclear and uncertain about the conceptual difference between secured and unsecured personal loans.
What are personal loans?
Personal loans are generally unsecured in nature i.e., they are not backed by collateral like gold loans or property loans. In stark contrast, secured personal loans need the borrower to definitely pledge an asset.
Assets such as fixed deposits, vehicles, or even jewellery and ornaments are pledged as collateral. The secured personal loans are extended to borrowers with low or limited credit history often at lower interest rates. As the risk of the lender is reduced immensely due to the provided collateral.
Key differences between secured and unsecured loans
- Collateral requirement: All secured loans require the borrower to pledge an asset. This asset can be gold ornaments, vehicles, fixed deposits, property among other similar assets. Unsecured loans do not have any such stipulation.
- Applicable interest rates: Generally the interest rates are lower in case of secured loans as they are backed by a collateral, whereas interest rates are higher in case of unsecured loans as there is no collateral to back them.
- Credit score sensitivity: Most of the unsecured loans rely heavily on a strong credit history and a high credit score. This is important because of no collateral backing in unsecured loans.
- Processing time: Unsecured loans are disbursed faster with minimal paperwork as these loans are backed by credit scores and repayment history. That is why the entire process of availing such loans becomes seamless.
- Consequences of defaults: In case of secured loans, the lender may repossess the asset upon non-payment. For example, the pledged gold, property or any other asset might be confiscated by the lender as per the terms and conditions of the loan contract. Whereas in case of unsecured loans credit scores might be negatively hampered making future borrowing more expensive, difficult to secure and time consuming.
Comparative overview of loan types
| Feature | Secured personal loan | Unsecured personal loan |
|---|---|---|
| Best suited for | Individuals with low credit scores but valuable assets | Salaried professionals with stable incomes and good credit |
| Documentation needed | Asset papers, valuation reports, and income proof | Basic KYC, salary slips, and PAN/Aadhaar |
| Loan tenure and flexibility | Typically longer, up to 7 years or more | Usually 1 to 5 years, depending on the lender |
| Prepayment and foreclosure terms | Often comes with stricter prepayment clauses and potential foreclosure charges, especially if linked to a fixed asset or deposit. | Many lenders allow part-prepayment or foreclosure with minimal or no charges after a certain lock-in period. |
Note: The features of secured and unsecured loans discussed above are illustrative in nature. For the updated terms, conditions and features on an individual basis refer to the official website of your respective lender.
Regulatory and market context
As per RBI guidelines all regulated lenders must ensure transparency in the terms of a loan, its requirements and eligibility including whether the loan product is secured or unsecured in nature on their respective websites and in customer agreement documents as well.
To meet the same guidelines, prominent NBFCs such as Bajaj Finance and banks such as HDFC Bank, ICICI Bank among others do provide detailed product disclosures to apprise the aspirational applicants about the pros, cons along with related terms and conditions of any particular loan product. So that they i.e., the aspirational borrowers can make an informed decision.
Further, in case of unsecured personal loans borrowers are suggested to regularly check their credit scores through authorised bureaus such as CIBIL, CRIF High Mark, Equifax among others before applying.
Calm and careful comparison of EMIs, interest rates and documentation requirements across distinct lenders is also a prudent way to move ahead while considering different kinds of credit lines.
Hence, with the RBI likely to cut repo rate by 25 basis points in its upcoming June 6 meeting, retail lending is expected to remain stable in the near term. That is why personal loans in both forms will continue to play a crucial role in bridging temporary financial gaps for millions across the country. Therefore, one should apply for new loans after properly considering these essential points.
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