diff --git a/CHANGELOG.md b/CHANGELOG.md
index 5a8e9d2c0e7ad..6bc7ee502437b 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -86,6 +86,9 @@ The format is based on [Keep a Changelog](http://keepachangelog.com/en/1.0.0/).
 - Fixed `apply_to_collection(defaultdict)` ([#10316](https://github.com/PyTorchLightning/pytorch-lightning/issues/10316))
 
 
+- Fixed interception of `__init__` arguments for sub-classed DataLoader re-instantiation in Lite ([#10334](https://github.com/PyTorchLightning/pytorch-lightning/issues/10334))
+
+
 - Fixed failure when `DataLoader(batch_size=None)` is passed ([#10345](https://github.com/PyTorchLightning/pytorch-lightning/issues/10345))
 
 
diff --git a/pytorch_lightning/lite/wrappers.py b/pytorch_lightning/lite/wrappers.py
index ad01b44ef30f4..881a663fdb9e5 100644
--- a/pytorch_lightning/lite/wrappers.py
+++ b/pytorch_lightning/lite/wrappers.py
@@ -14,6 +14,7 @@
 import functools
 import inspect
 from contextlib import contextmanager
+from itertools import chain
 from typing import Any, Callable, Dict, Generator, Iterable, Iterator, Optional, Set, Sized, Type, Union
 
 import torch
@@ -109,7 +110,7 @@ def wrapper(module: Any, *args: Any, **kwargs: Dict[str, Any]) -> None:
         params = dict(inspect.signature(module._old_init).parameters)
         params.pop("args")
         params.pop("kwargs")
-        for init_name, init_arg in zip(params, args):
+        for init_name, init_arg in chain(zip(params, args), kwargs.items()):
             setattr(module, init_name, init_arg)
         f(module, *args, **kwargs)
 
@@ -118,15 +119,15 @@ def wrapper(module: Any, *args: Any, **kwargs: Dict[str, Any]) -> None:
 
 # https://stackoverflow.com/a/63851681/9201239
 def _get_all_subclasses(cls: Type[Any]) -> Set[Type[Any]]:
-    subclass_list = []
+    subclasses = set()
 
     def recurse(cl: Type[Any]) -> None:
         for subclass in cl.__subclasses__():
-            subclass_list.append(subclass)
+            subclasses.add(subclass)
             recurse(subclass)
 
     recurse(cls)
-    return set(subclass_list)
+    return subclasses
 
 
 def _enable_class(cls: Type[Any]) -> None:
diff --git a/tests/lite/test_lite.py b/tests/lite/test_lite.py
index 8eac30f9cf823..b563e56e2fdec 100644
--- a/tests/lite/test_lite.py
+++ b/tests/lite/test_lite.py
@@ -164,6 +164,34 @@ def test_setup_dataloaders_return_type():
     assert lite_dataloader1.dataset is dataset1
 
 
+def test_setup_dataloaders_with_custom_type():
+    """Test that Lite intercepts arguments passed to custom subclasses of torch.utils.DataLoader and sets them as
+    attributes."""
+
+    class DataLoaderSubclass1(DataLoader):
+        def __init__(self, attribute1, *args, **kwargs):
+            # intentionally not setting this attribute, calling super with different args
+            # self.attribute1 = attribute1
+            super().__init__(*args, **kwargs)
+
+    class DataLoaderSubclass2(DataLoaderSubclass1):
+        def __init__(self, attribute1, attribute2, *args, **kwargs):
+            # intentionally not setting this attribute, calling super with different args
+            # self.attribute2 = attribute2
+            super().__init__(attribute1, *args, **kwargs)
+
+    class LiteWithCustomDataLoader(LightningLite):
+        def run(self):
+            dataloader = DataLoaderSubclass2("attribute1", "attribute2", dataset=range(4), batch_size=2)
+            assert dataloader.attribute1 == "attribute1"
+            assert dataloader.attribute2 == "attribute2"
+            lite_dataloader = self.setup_dataloaders(dataloader)
+            assert lite_dataloader.attribute1 == "attribute1"
+            assert lite_dataloader.attribute2 == "attribute2"
+
+    LiteWithCustomDataLoader().run()
+
+
 def test_setup_custom_dataloaders():
     """Test that the setup_dataloaders method returns the dataloaders wrapped as LiteDataLoader."""
     lite = EmptyLite()