Banks in India offer credit to customers under two categories. The first category is secured loans, and the second is unsecured loans. The difference between these two categories can be attributed to the presence of collateral. In simple terms, unsecured loans involve borrowing without collateral while secured loans offer credit with collateral.
See also: How are home loans and home construction loans different?
What is collateral in a loan?
Oftentimes, when banks issue you credit, they make you pledge and assets that they are legally free to take over, sell in an open market and recover losses if you as a borrower were to fail in repaying the loan with interest. Such a loan is known as a secured loan because banks have security against future risk of non-payment. The asset one pledges to secure for a loan is known as collateral.
In case of secured loans, the loan agreement invariably would have a repossession clause providing a lender the right to sell collateral in case a borrower defaults on loan payments.
What are the examples of secured loans?
- Home loan
- Auto loan
- Life insurance loan
- Gold loan
- Mortgage loan
What are the examples of unsecured loans?
- Personal loan
- Student loan
- Business loan
- Credit cards
- Wedding loan
- Vacation loan
- Home renovation loan
- Consumer durable loan
- Bridge loan
- Top-up loan
What is collateral in a home loan?
The property you buy with the help of a housing loan acts as a collateral in home finance. This is precisely why home loans in India are available at much lower interest rates than an unsecured loan like personal loan.
Sample this: In October 2023, India’s largest public lender State Bank of India was charging an 8.4% annual interest on home loans. It is, however, offering personal loans at an annual interest rate of 11.05% to 14.05%.
Further, as the property acts as a collateral, banks keep the original property papers in its repository till the borrower has fully repaid the loan. Banks return the property papers to buyers only after this obligation is met.
FAQs
What is a secured loan?
A secured loan is one in which a bank makes a borrower pledge an asset against the loan or credit.
What is an unsecured loan?
An unsecured loan is one in which a bank does not make a borrower pledge an asset against the loan or credit.
What is collateral in a loan?
The asset one pledges to secure for a loan is known as collateral.
In which category does a home loan fall?
Home loans fall under the secured category as one’s property is pledged as collateral with a bank that considers it as security.
In which category does a personal loan fall?
Personal loans fall under the unsecured category. This is why personal loans command a much higher interest rates than secured loans, such as home or auto loans.
In which category does a gold loan fall?
Gold loan falls under the secured category as the yellow metal is pledged with a bank as security.
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An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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