The loans and advances granted by banks are broadly classified into two categories: secured and unsecured loans. A secured loan or advance means a loan or advance made on the security of assets, the market value of which is not at any time less than the amount of such loan or advance. On the other hand, an unsecured loan or advance means a loan or advance not secured.

The distinguishing features of a secured loan or advance is that the loan must be made on the security of tangible assets like goods and commodities, land and buildings, gold and silver, corporate and government securities. The fee for these assets must favor the bank. The market value of each security must not be less than the amount of the loan until the loan is repaid. If, however, there is a decline in market prices, this loan will be considered partly secured.

The distinction between secured and unsecured loan is made on the basis of legal title or charge created in favor of the lender. Under the traditional principles of lending, the borrowing capacity of a person is judged on the basis of the tangible assets in borrowers possession, i.e., the larger the creditworthiness of a borrower, if larger is the value of his tangible assets.

Unsecured loans can be risky, in that the interest charged is higher (because of the lack of collateral.) If you don't pay off an unsecured loan on time, your credit will suffer. That's why it is better to go for a secured loan when possible. Either way, it is wise to make your loan payments on time.