Types of Secured and Unsecured Loans

"This article will explain the types of secured and unsecured loans that are provided by lenders to potential borrowers at a certain interest rate."

Types of Secured and Unsecured Loans

5 mins read

Published: 31 October 2023

Updated: 31 October 2023

The article will explain the types of secured and unsecured loans that are provided by lenders to potential borrowers at a certain interest rate. Before digging deep into the heavy words of the financial services industry. Let's start with the basics of loans. A loan is financial help that is provided to the borrower or in simple terms a person who needs it. The financial help is provided by the banks and the registered institutions also called the NBFCs or non-banking financial companies. If you are living in India then you might be familiar with some of the names of banks like State Bank of India, Punjab National Bank, Axis Bank, HDFC Bank, etc. The first two are government-operated banks while the latter are private banks. Similarly, there are renowned NBFCs like Aditya Birla, Bajaj Finserv, and Cholamandalam Investment and Finance Company.

A Secured Loan is one that needs collateral to be pledged as security for taking a loan. These types of loans involve low risk as land, property, gold, or any other asset is pledged to the banks. So even if a borrower defaults on the EMI, the lender can take possession of the pledged assets. On the other hand, an unsecured loan is one that is approved based on the creditworthiness or income of the borrower. No collateral is pledged as the security to the lender. This article shall explain to you all the types of secured and unsecured loans that are available in India.

Secured Loan - A Comprehensive Guide

The above paragraph has provided you with a glimpse of what is a secured loan. But to make things more clear, let's understand in simple words what is a secured loan. A secured loan is like a promise to pay back money, but you have to provide something valuable (like a car or a house) as a guarantee. If you can't pay back the money, the lender can take your valuable thing to cover the debt. It's like borrowing money with collateral to make sure the lender doesn't lose out.

Types of Secured Loan

There are several types of secured loans, each backed by valuable assets that serve as collateral to protect the lender in case the borrower can't repay the loan. Here are some common types of secured loans:

1. Mortgage Loans: When you buy a home, you typically get a mortgage loan. The house itself is the collateral. If you can't make payments, the lender can take your house. The interest rate for the loan against property and the home loan usually starts from 8.5% P.A.

2. Auto Loans: When you finance a car, the car becomes the collateral. If you don't make payments, the lender can repossess your vehicle. The important thing here is that a person cannot get 100% financial help on auto loans. You ought to make a certain down payment for taking a car loan.

3. Loan Against Property: If you own a home, you can borrow against the equity (the value of your home minus what you owe on the mortgage). The house is used as collateral.

4. Secured Credit Cards: You deposit money in a savings account as collateral, and your credit limit is typically the amount you've deposited. This helps people with poor credit build or rebuild their credit.

5: Loan Against Mutual Funds: A mutual fund that you have taken for the investment acts as the collateral. You can keep your investment and also get financial help on it. Know the loan against mutual funds interest rate and utilize your funds to get a loan with ease.

These loans are considered less risky for lenders because they have something to claim if you don't pay. However, it's important to be cautious and ensure you can meet the repayment terms to avoid losing your valuable assets.

Eligibility and Documentation for Secured Loan

Eligibility for a secured loan depends on the lender and the type of loan, but generally, you need a valuable asset to use as collateral, like a house or car. Lenders also consider your credit history, income, and ability to repay.

The documents required for the secured loan typically include proof of identity, residence, and income. For a mortgage, you'll need property-related documents. Auto loans require vehicle details. Personal identification, proof of assets for collateral, and financial records are common across secured loans. The specific requirements vary from lender to lender, so it's essential to check with the lender for precise eligibility criteria and necessary documents.

Unsecured Loan- A Detailed Guide

An unsecured loan is like borrowing money based on your promise to repay without needing to provide collateral, such as a house or car. Lenders decide to lend based on your creditworthiness, income, and financial history. Because there's no collateral, unsecured loans typically have higher interest rates than secured loans.

Examples include personal loans and credit cards. If you fail to repay, the lender can't automatically take your property, but they may take legal action or send the debt to collections to recover the money. Unsecured loans rely on trust in your ability to pay back what you borrow.

Types of Unsecured Loans

Unsecured loans come in various forms to serve different financial needs. Here are some common types of unsecured loans in simple terms:

1. Personal Loans: These are versatile loans that you can use for various purposes, from consolidating debt to financing a vacation. They don't require collateral and are usually based on your creditworthiness. The interest rate for an online instant personal loan starts from 10.50% P.A.

2. Credit Cards: Credit cards are a common form of revolving unsecured credit. You can make purchases up to your credit limit and pay it back over time, but interest rates can be high if you carry a balance.

3. Student Loans: These loans help pay for education expenses and don't need collateral. They often have lower interest rates and flexible repayment options.

4. Medical Loans: Designed for covering medical expenses, these loans don't require collateral and often offer special financing options.

5. Peer-to-Peer Lending: These loans are arranged through online platforms where individuals or investors lend money to borrowers based on their credit profile.

6. Line of Credit: A line of credit allows you to borrow money as needed, up to a predetermined limit. You only pay interest on the amount you borrow.

Remember that because these loans are unsecured, they usually require a good credit score and a stable income to qualify. Interest rates can be higher compared to secured loans to offset the risk for the lender.

Eligibility and Documentation for Unsecured Loan

To get an unsecured loan, a borrower typically needs a good credit score, a stable income, and a low debt-to-income ratio. A borrower must provide identification, and proof of income (like pay stubs or tax returns), and fill out a loan application. Lenders may also check your credit report. Some could request bank statements, references, or additional financial details. Specific requirements vary by lender, so it's important to inquire about their eligibility criteria and document requests when applying for an unsecured loan.


The above article makes it easy for a person to understand the types of secured and unsecured loans. Based on your income and the security you can choose the loan and get it approved and disbursed from top banks. If you have a confusion about what bank to choose or decrease your chances of getting a loan rejected then it is preferable to choose My Mudra one of the top fintech companies in India. My Mudra will make it easy for you to get secured as well as unsecured loans. The company has tied up with all the banks and the NBFCs. Let us choose which bank or NBFC can help you in getting financial aid.

Also read: Get your Personal Loan Approved with a Low CIBIL Score

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