Tata Capital > Blog > Personal Use Loan > Secured vs unsecured personal loan: Differences & how to choose
30 October 2026
11 mins read
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A personal loan is secured or unsecured. If you take a secured loan, you must pledge collateral, like a home or car, whereas if you take an unsecured loan, there is no need to pledge assets. The approval and terms of an unsecured personal loan depend on your creditworthiness. It carries a higher interest rate since there is no collateral involved and the lender’s risk is higher. Credit limits are also typically lower. On the other hand, secured personal loans let you borrow larger amounts over longer periods.
Secured loans require collateral and offer lower interest rates. Unsecured personal loans require no collateral. They are quicker to get but costlier to repay due to higher interest rates.
With the economic effects of the pandemic finally coming true, both individuals and organizations are trying to get back on their feet and mend their finances. For individuals who have faced salary cuts and have delayed payments, a personal loan is often what comes to the rescue. There are two types of personal loans – secured and unsecured. What is a secured loan and unsecured loan, what’s the difference, and which one should you choose? Let’s have a brief look.
When you avail a secured loan, you basically take it from an insurance agency along with an asset that can back up the loan. The asset is mortgaged for the amount you borrow as a secured personal loan. Once you repay your entire loan amount, your asset can be free from mortgage and you needn’t worry about it anymore. However, till the time your loan is not repaid, your asset is virtually held by the bank. If you fail to make the payment, your asset can be taken over by the lender. Secured loan interest rates are lower than other loan options since assets are kept as security.
Some common examples of secured personal loans include gold loans, auto loans, Fixed Deposit (FD) loans, Loan Against Securities (LAS), and life insurance loans.
The advantages of a secured personal loan are:
The disadvantages of a secured personal loan are:
Unsecured personal loans are not protected by any collateral. The interest rates for these loans are generally higher as opposed to secured personal loans. These are usually taken by individuals who are able to repay smoothly without having to compromise on their assets. The principal amount could be lower than that of a secured loan, and so would be the repayment tenure.
A key difference between secured and unsecured personal loans, apart from the collateral requirement, is the interest rate. Unsecured personal loans carry a higher interest rate.
The common types of unsecured loans include personal loans for credit cards and various other expenses, education loans for higher studies, and business loans for working capital or expansion. Term loans, revolving credit, and consolidation loans are also types of unsecured loans.
Unsecured personal loans offer the following advantages:
Unsecured personal loans have the following disadvantages:
Now that we are clear on what is secured loan and unsecured loan, let’s delve into their differences. Before applying for a loan, it’s important to know what the difference between secured and unsecured personal loan is.
Let’s look at the secured vs unsecured loan table below for easy loan comparison:
| Criterion | Secured Loans | Unsecured Loans |
| Collateral/Security | Requires an asset as a collateral e.g., property, vehicle, stocks, or other valuables. | No collateral required; loan is given based on borrower’s creditworthiness and income. |
| Interest Rate | Lower rate. Because there’s collateral, the lender’s risk is less, so they can charge lower interest. | Higher rate. Since there’s no asset backing, the risk to lender is bigger, so interest is higher. |
| Borrowing Limit/Loan Amount | There’s a higher borrowing limit. The amount you can borrow is often linked to the value of the collateral. | Lower limit compared to secured loans. Since there’s no collateral, lenders restrict how much they can lend. |
| Repayment Tenure (Loan Term) | Longer tenure. Secured loans often let you pay back over a longer period. | Shorter repayment term generally. |
| Risk/Consequences of Default | Higher risk for borrower’s assets: if you default, lender can seize and sell the collateral. | No direct seizure of physical assets, but defaulting hurts your credit score, and the lender may take legal action. |
There are certain key aspects to consider before choosing any personal loan. The primary factor is, of course, the interest rate. Interest rates vary from lender to lender. The other key aspect is the process of acquiring the loan. Many times, the need for a personal loan is urgent. At such a time, you wouldn’t want to waste precious time on a long documentation process. You should always do your homework and conduct a quick check by comparing loans on an aggregator site. You can also check the personal loan EMIs and interest rates offered by various lenders on their official websites.
Based on all of these considerations, we strongly suggest an unsecured personal loan over a secured one, because of the following factors.
Now let’s answer the question “When to take a secured loan?” Secured loan is suitable for individuals who have valuable assets (such as property, vehicles, gold, or financial investments) that they can pledge as collateral to secure a lower-cost, higher-value loan.
The ideal candidate profile for a secured personal loan is someone who:
If you’re wondering when to take an unsecured loan, it usually works well for people without collateral or who need quick access to funds. Unsecured loan is suitable for borrowers with stable income and good credit.
Knowing when to take an unsecured loan helps ensure it aligns with your financial condition.
The ideal candidate profile for an unsecured personal loan is someone who:
To get a personal loan – secured or unsecured, you must fulfill various eligibility conditions. These include:
A loan application isn’t complete without supporting paperwork. If you are applying for a personal loan – secured or unsecured – you must submit the following documents:
Some lenders may request additional documents to complete the verification. Discuss with the authorized representative and provide as required.
The interest rates secured vs unsecured loans can vary significantly due to several factors affecting loan interest. It depends primarily on the risk to the lender, the borrower’s credit profile, and the nature of the loan. These factors will help borrowers in understanding how interest rates are determined and help them make informed choices before deciding on secured loan vs unsecured loan:
Both secured loan and unsecured loan can have an impact on your credit score, but due to different reasons.
The secured loan credit score impact depends on timely repayments and responsible management of the collateral. Regular payments can boost your credit profile, while defaults may lead to the lenders seizing your asset and a negative mark on your credit report. Understanding this effect helps borrowers plan repayments carefully.
Whereas unsecured loan credit score effect is tied entirely to your repayment behavior. Missed payments directly lower your score, as there is no collateral to offset the lender’s risk. Monitoring loans and credit scores ensures borrowing strengthens, rather than weakens, your financial standing.
Many borrowers aren’t sure whether a secured personal loan is better than an unsecured personal loan. Consequently, they make mistakes that result in uninformed choices. Here are the top 5 mistakes you should avoid while making a decision:
A personal loan EMI calculator helps you estimate the monthly installment you need to pay as per your loan amount, loan tenure, and interest rate. You can use it to compare the EMI you need to pay for secured vs unsecured personal loans.
Secured personal loans usually have lower interest rates because they are backed by collateral, resulting in lower EMIs. Unsecured personal loans generally have higher interest rates, which can increase the monthly EMI.
When you compare the results of both options, you can understand the total repayment cost. Accordingly, you can choose a loan that best fits your budget and financial needs before applying.
The ultimate choice for your personal loan needs will depend on your specific requirements and financial situation. However, no matter how urgent it is, do remember to conduct a thorough check and make an informed decision. Use loan calculators and get an accurate idea of what you’re signing up for.
If you’ve made up your mind about an unsecured loan, Tata Capital Unsecured Personal Loan would be a good choice with its flexible repayment tenure, quick documentation and easy processing, and attractive interest rates, among other features.
A secured loan requires collateral, such as property or savings, while an unsecured loan does not. Secured loans reduce lender risk, often allowing higher borrowing amounts, whereas unsecured loans rely entirely on the borrower’s creditworthiness. Hence, requirement of collateral forms the key difference between secured loan vs unsecured loan.
When the option is between secured loan and unsecured loan, secured loans generally have lower interest rates. It is because the collateral reduces the lender’s risk. Unsecured loans carry higher rates as there is no asset to recover in case of default.
No, unsecured personal loans do not require collateral. Approval is based on income, credit score, and repayment capacity, rather than pledged assets.
If you default on a secured loan, the lender can seize the pledged asset. Proper repayment avoids any negative effect on your property or savings.
Secured loans can be easier to obtain for borrowers with collateral, even with lower credit scores. On the other hand, unsecured loans depend heavily on strong credit and stable income.
Lenders usually require a good credit score, typically above 700, for unsecured personal loans. Higher scores improve approval chances and interest rate offers.
In most cases, loans cannot be converted directly. You may repay the unsecured loan and take a new secured loan using collateral, subject to lender approval.
Defaulting can lead to the lender seizing the collateral, harming your financial stability and potentially affecting your credit score.
Unsecured loan defaults do not risk assets, but they severely damage your credit score, increase penalties, and may lead to legal action.
Between secured and unsecured loans, for small amounts, unsecured loans are more suitable as they don’t require pledging of assets as collateral and also get approved faster than secured loans.
The approval of a secured personal loan takes longer than that of an unsecured personal loan. You can get an unsecured loan approved within minutes and disbursed within 24 to 72 hours. On the contrary, lenders and banks can take around 2 days to a few weeks to approve and fund a secured loan. This is because they need to thoroughly evaluate and verify the pledged asset.
It is possible to get an unsecured personal loan with a low credit score, but it will be more difficult. Since the lender’s risk will increase, you will have to manage higher interest rates and potentially smaller loan amounts.
The maximum loan amount you can get for a secured loan depends on the value of the asset you are pledging as collateral. In the case of an unsecured loan, the amount depends on the lender’s policies and your financial profile, such as your monthly income, credit score, and employment status.
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