There are two basic types of loans granted by lenders namely Secured and Unsecured loans. The secured loans are those loans which are granted by the lenders taking security from the borrower against the loan. The security may be prime security or collateral security.Prime security is an asset acquired by a borrower under a loan and it is the same asset that is offered to the lender as a security for the financed amount. For example, a lender will hold the deed or title until the loan has been paid in full, including interest and all applicable fees for the home loan released by the bank.Here the house purchased under bank loan itself is a prime security.The collateral security is one where the lender asks the borrower to provide extra security in addition to the prime security. For example, in case of large amount of finance made by the bank, the borrower will ask borrower to provide extra security in addition to the prime security like stocks, machinery etc. hypothecated to the lender.In case the borrower fails to repay the loan, the lender may sell or dispose off the property/assets which are offered to him as prime/collateral security, to recover the loan amount and interest from such borrower.
The unsecured loans are those loans which are not backed by the security. Lenders takes risk in granting unsecured loans as the loan is not backed by property or assets to recover in case of default. Temporary overdrafts, credit card facilities, personal loans, education loan where collateral security is not available, the examples of unsecured loans. Because of the risk involved the interest rates charged on unsecured loans are considerably higer compared to secured loans.