What Is the Difference between Under-Collateralized and Over-Collateralized Loans?

Over-collateralized loans require the borrower to deposit collateral with a value greater than the loan amount, common in DeFi due to the lack of identity verification. Under-collateralized loans require collateral less than the loan amount, or none at all, relying on credit history or reputation, common in traditional finance.

Flash loans in DeFi are a unique exception to over-collateralization.