alexa
Home Articles Unsecured Loan

Unsecured Loan

IndianMoney.com Research Team | Updated On Tuesday, September 18,2018, 05:29 PM

5.0 / 5 based on 1 User Reviews

Unsecured Loan

 

 

Unsecured loans are credit instruments offered by banks and non-banking financing companies (NBFCs). These loans are sanctioned without any collateral. These are sanctioned based only on your (the borrower's) creditworthiness.

Want to know more on Personal Loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

Unsecured Loan

Unsecured loans carry high risks and charge high interest rates and require high credit scores. The lender doesn’t have any collateral to recover the debt in case of default.

Unsecured Loans v/s Secured Loans:

  • An unsecured loan is not secured against any collateral, whereas, a secured loan is sanctioned only against collateral.
  • Secured loans have a low rate of interest vis-a-vis unsecured loans.

Types of Unsecured Loans:

1. Credit Cards:

With credit cards you can shop today and pay tomorrow. A credit card is used to pay for purchases on credit basis. You (credit card holder) are granted a certain amount, called the credit limit, which is the maximum amount that can be spent. If you breach the credit limit, you may have to pay additional charges.

Credit card interest rates are comparatively higher than other forms of unsecured loans. If not managed well, a credit card can land you in a debt trap. Avoid paying the minimum balance on credit cards. Make sure to pay credit card dues of every credit cycle on time.

2. Personal Loans:

A personal loan is also called a ‘no-reason loan’ because you don’t have to state reasons for availing them. You have to repay a personal loan in equated monthly installments (EMIs), over a fixed tenure. You can also prepay a personal loan if banks allow you to do so. Banks may charge a prepayment fee. Apart from visiting the branch, you can also avail online personal loans.

3. Payday Loans:

Payday loans are small loans offered to salaried individuals. This is great if you live paycheck to paycheck. These loans can be repaid on receiving your next salary. Interest rates on payday loans are quite high. These loans are offered in exchange for some proof of your monthly income, for example, a pay slip. Payday loans are also called salary loans, cash advance loans and payroll loans.

4. Peer-to-Peer Loans:

Peer-to-Peer loans are popularly known as P2P lending, social lending and crowd lending. In peer-to-peer lending, you can borrow and lend without the involvement of an official financial institution. P2P loans are offered by individuals or peers. It is more time consuming and requires a lot of effort and is risky compared to bank loans.

You might have to furnish income proof like salary slips or bank statements. These loans have a fixed interest rate. The eligibility criteria of availing peer-to-peer loans are less stringent vis-à-vis bank loans.

5. Education Loans:

Also known as a student loan, an education loan is offered to pay fees for education courses. Education loans come with a moratorium period (holiday period or waiting period), during which you don’t have to repay anything. Education loan offers interest rates subsidy and flexible repayment modes. These loans fund amounts related to academic courses like course fees, library fees, hostel fees, mess fees and so on.

6. Signature Loans:

Signature loans are sanctioned only on the security of your signature. Your signature alone serves as a guarantee to repay the loan on time. Both banks and NBFCs offer these loans.

A signature loan is to be paid in installments on a monthly basis till the debt is completely repaid. Signature loans can be availed in the form of a personal loan. This also helps build a good credit score.

Eligibility Criteria for Unsecured Loans:

The eligibility criteria for unsecured loans are more stringent than secured loans:

  • You should have stable employment.
  • You should be at least 21 years of age. Salaried individuals shouldn’t be more than 60 years and self-employed shouldn’t be more than 65 years.
  • Salaried individuals should be employed for a minimum of 2 years.
  • Self-employed should have been earning for a minimum of 5 years.
  • Furnish current financial statements while applying for the loan.
  • You should have a good credit history. It influences the flexibility of eligibility criteria, interest rate and loan amount.
  • You shouldn’t have any pending EMIs from other loans.

Documentation Required for Taking an Unsecured Loan:

I. Salaried Applicants:

  • Duly filled loan application form
  • Passport size photographs
  • Identity proof like passport, driving license, voters ID, PAN card
  • Residence proof like utility bill, ration card
  • Last 3 or 6 months’ salary slips

II. Self-Employed Applicants:

  • Office address proof
  • Business continuity proof
  • Cheque for processing fees
  • Duly filled loan application form
  • Passport size photographs
  • Identity proof like passport, driving license, voters ID, PAN card
  • Residence proof like utility bill, ration card
  • Last 3 or 6 months’ bank statements

Unsecured Loan Interest Rates:

Unsecured loans come at higher interest and lower loan amounts compared to secured loans. Interest rates on unsecured loans can be negotiated based on loan amount, employment status, annual income, and so on.

Unsecured Loan Tenure:

The loan tenure for unsecured loans doesn’t exceed 5 years.

Purpose of Unsecured Loans:

Unsecured loans can be availed for:

  • Meeting short-term financial needs
  • Building a good credit score.

Features and Benefits of Unsecured Loans:

  • Unsecured loans like personal loans can be availed with ease. You can also apply for these loans online.
  • The application process of unsecured loans is quick.
  • These are great in times of emergencies.
  • Unsecured loans have high-interest rates
  • These are for small loan amounts.
  • These loans are sanctioned based on credit worthiness and not against collateral.
  • Your income decides the interest rate on unsecured loans.
  • Income and loan amount have a direct relationship. Higher income means a higher loan amount.
  • Unsecured loans are sanctioned for a short tenure.

Particulars

Secured Loans

Unsecured Loans

Collateral

Requires collateral/security

Doesn’t require collateral/security

Purpose

Purpose of the loan is specific like purchase of car, two wheeler or house

Can be used for any purpose

Risk of default

Lower than unsecured loans

High

Loan default consequences

You may lose your pledged asset

There's no risk of losing your pledged asset, as there is no collateral

Interest rates

Lower than unsecured loans

Higher interest rates

Loan tenure

Longer tenure than unsecured loans

Short tenure

Banks Offering Unsecured Loans in India:

Most Indian banks and non-banking financial companies offer unsecured loans.

See Also: Get Personal Loans in Emergency Situations

How to get your Unsecured Loan Sanctioned by your Lender:

  • Applying for an unsecured loan requires extra effort.
  • Make sure you meet all the eligibility criteria laid down by the lender.
  • Unsecured loan applications have stringent requirements.
  • Make sure you have a stable income and good credit history.
  • Try to build a high credit score.
  • If you haven’t availed any credit in the past, it’s time you build a credit score.
  • If you have a poor credit score, enhance it before applying for unsecured loan.
  • Lenders have minimum income criterion. Make sure you check it.
  • Keep ready all required documents like pay slips, ITR, bank statements and so on for verification of income details.

What can be done if your Unsecured Loan Application does not get Approved?

1. If your loan was rejected due to debt-to-income ratio, try applying for a lower amount.

2. Apply for the loan with the help of a co-signer or a guarantor who will take the responsibility of repaying your loan in case of default.

3. If your loan application gets rejected due to poor credit score or low income, you can resort to furnishing collateral.

4. Apply after improving your credit score.

5. Refrain from applying for too many loans or credit cards.

6. Make sure to pay all your EMIs and bills promptly.

It is wise to avail an unsecured loan only in emergencies. Why would you want to pay a high interest rate? Also, be sure that you don’t default on the loan repayments. This will affect your credit score. 

Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.

You May Also Watch:

Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.

Have a complaint against any company? IndianMoney.com's complaint portal Iamcheated.com can help you resolve the issue. Just visit IamCheated.com and lodge your complaint. If you want to post a review on any company you can post it on Indianmoney.com review and complaint portal IamCheated.com.

Be Wise, Get Rich.

Related Articles

 

Did you find this article useful? You can Rate us
5.0 / 5 based on 1 User Reviews
Article Author

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
CIBIL Meter
Get It now!
Attention!

This is to inform that Suvision Holdings Pvt Ltd ("IndianMoney.com") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.