When looking for financial assistance, borrowers often come across two main types of loans—secured loan vs unsecured loan. Understanding the difference between these two can help individuals and businesses make informed borrowing decisions.
A secured loan vs unsecured loan comparison primarily revolves around collateral. A secured loan requires the borrower to pledge an asset as security, whereas an unsecured loan does not. One common form of a secured loan is a loan against fixed deposit, where the borrower pledges their FD to secure funds.
This article will explain the differences, benefits, and key considerations of secured loans vs unsecured loans, helping you decide which option is best suited to your financial needs.
What is a secured loan?
A secured loan is a type of loan where the borrower provides collateral—such as property, gold, or a fixed deposit—to the lender. Since the loan is backed by an asset, the lender faces lower risk, leading to lower interest rates and better repayment terms.
Examples of secured loans include:
- Loan against fixed deposit – Borrowers pledge their FD to secure a loan without breaking the deposit.
- Home loan – A loan taken to purchase property, where the house acts as collateral.
- Gold loan – A short-term loan secured against gold jewellery.
- Vehicle loan – A car or bike loan where the vehicle itself is collateral.
What is an unsecured loan?
An unsecured loan is a loan where no collateral is required. Since there is no security backing the loan, lenders rely on the borrower’s creditworthiness and income to approve the loan. As a result, unsecured loans come with higher interest rates and stricter eligibility criteria.
Examples of unsecured loans include:
- Personal loans – Commonly used for emergencies, travel, or medical expenses.
- Credit card loans – Borrowing against a credit card limit with high-interest charges.
- Student loans – Loans given for education without requiring collateral.
Key differences between secured and unsecured loans
| Feature | Secured Loan | Unsecured Loan |
| Collateral required | Yes (e.g., property, gold, FD) | No |
| Interest rates | Lower | Higher |
| Loan amount | Higher loan amounts | Limited loan amounts |
| Eligibility | Flexible, as asset secures loan | Strict eligibility criteria |
| Risk for borrower | Risk of asset loss if default occurs | No asset loss, but impact on credit score |
| Approval process | Faster approval with minimal credit checks | Takes longer due to credit evaluation |
| Common examples | Loan against fixed deposit, home loan, gold loan | Personal loan, credit card loan, education loan |
Advantages of secured loans
1. Lower interest rates
Since secured loans require collateral, lenders face lower risk and, in turn, offer lower interest rates compared to unsecured loans. For example, a loan against fixed deposit typically has an interest rate just 1-2% above the FD rate, making it much cheaper than a personal loan.
2. Higher loan amounts
With collateral securing the loan, lenders are more willing to offer higher loan amounts. For instance, a home loan or loan against FD allows borrowers to secure funds based on the value of the pledged asset.
3. Easier approval and eligibility
A secured loan is generally easier to obtain because lenders focus more on the value of the asset rather than the borrower’s credit score. This makes secured loans ideal for individuals with low credit scores or those who do not meet stringent income requirements.
4. Longer repayment tenure
Secured loans usually come with longer repayment periods, making them easier to manage. A loan against fixed deposit, for example, allows borrowers to pay interest only on the utilised amount while keeping their investment intact.
5. No impact on credit score
Unlike unsecured loans, where defaulting can severely damage your credit score, secured loans offer a cushion as the lender has the right to recover losses by liquidating the asset. This means borrowers have more flexibility in managing repayment.
Advantages of unsecured loans
1. No collateral required
One of the biggest benefits of an unsecured loan is that it does not require the borrower to pledge any asset. This makes it accessible for those who do not own valuable assets such as property or FDs.
2. Quick access to funds
Since unsecured loans do not involve collateral evaluation, the approval process is usually faster. This makes them suitable for emergencies where immediate funds are required.
3. No risk of asset loss
Unlike a secured loan, where failing to repay could lead to losing an asset, unsecured loans do not carry the risk of losing property or investments. However, they can impact your credit score significantly if payments are missed.
When should you choose a secured loan?
- When you need a high loan amount – If you require a large sum, such as for a home purchase, business expansion, or education, a secured loan offers better financial flexibility.
- When you have collateral available – If you own assets such as property, gold, or a fixed deposit, you can use them to access lower interest rates.
- When you want to save on interest costs – A secured loan has lower interest rates, reducing overall borrowing costs compared to unsecured loans.
- When you prefer longer repayment tenures – Secured loans offer extended repayment periods, reducing monthly EMI burdens.
- When you have a low credit score – Secured loans are accessible even to those with weak credit histories, as the lender relies on collateral for security.
When should you choose an unsecured loan?
- When you do not have collateral – If you do not own assets like property or FDs, an unsecured loan is the only option.
- For urgent financial needs – When you need quick funds, personal loans and credit card loans offer instant approval.
- For small loan amounts – If you need a small amount for short-term needs, an unsecured loan is convenient.
- When you do not want to risk your assets – If you are not comfortable pledging property or investments, an unsecured loan provides a risk-free borrowing option.
Why a loan against fixed deposit is a smart choice
A loan against fixed deposit is one of the best secured loan options as it allows you to borrow money without breaking your FD. Here’s why:
- Lower interest rates – Since the FD is pledged as security, the loan is available at rates much lower than personal loans.
- No impact on FD earnings – The FD continues to earn interest even while being used as collateral.
- Flexible repayment options – You can repay at your convenience without affecting the FD maturity.
- Instant approval – Since the FD is already with the bank, processing is quick and hassle-free.
Conclusion
The choice between a secured loan vs unsecured loan depends on your financial situation, loan requirements, and risk tolerance. Secured loans, such as a loan against fixed deposit, offer lower interest rates, higher loan amounts, and longer repayment tenures, making them ideal for planned expenses and large financial needs.
On the other hand, unsecured loans provide quick access to funds without requiring collateral, making them suitable for urgent or short-term financial needs. Understanding these differences will help you select the right loan type based on your financial goals and repayment capacity.
