Unsecured Loan Definition by RBI

An unsecured loan is a type of credit that does not require the borrower to provide collateral to the lender. According to the Reserve Bank of India (RBI), unsecured loans are based on the borrower's creditworthiness and their ability to repay. This type of loan is often used for personal expenses, including medical bills, home improvements, or education. The absence of collateral makes these loans riskier for lenders, which is reflected in higher interest rates compared to secured loans. To mitigate the risk, lenders may impose stricter credit requirements and higher interest rates. Unsecured loans typically include credit cards, personal loans, and student loans. They are advantageous for borrowers who may not own significant assets or prefer not to risk their property. The RBI provides guidelines for unsecured loans to ensure responsible lending and borrowing practices, aiming to balance the interests of both parties involved. Financial institutions are required to follow these guidelines to maintain transparency and fairness in the lending process.