Unsecured Loans: Types, Features and Benefits

If you thought, taking a loan always involves pledging a collateral, then this article is for you. Also, if you have been postponing your dream vacation or redoing your house, then it is time you consider taking an unsecured loan.

To know more about Unsecured Loans, check the section below.

What is an Unsecured Loan?

An unsecured loan or a collateral-free loan is a loan that does not require any type of collateral. An unsecured loan meaning translates to a lender approving a loan based on the borrower’s creditworthiness. Let us understand some more features of unsecured loans.

Types of Unsecured Loans

Generally, lending institutions offer three types of unsecured loans. They are as follows:

Revolving Loan: A revolving loan allows the borrower to enjoy the privilege of spending again, after repaying the loan. This means, a borrower can enjoy the credit limit multiple times entirely or in parts, upto the credit limit set by the bank.

Term Loan: An unsecured term loan is a lumpsum loan that is generally offered at a fixed rate. The repayment is done in EMIs at regular intervals in a fixed period. This type of a loan is useful in making purchases of fixed assets that require bulk payment.

Consolidate Loan: This type of loan is useful when a borrower has accumulated debts, making repayments difficult especially with high interest rates. A consolidate loan is designed to clear the borrower’s accumulated debt and ease his repayment burden.

Features of Unsecured Loans

• No Collateral Required: The chief characteristic difference between a secured and unsecured loan is that an unsecured loan does not require collateral. A personal loan, an education loan and a credit card loan are examples of an unsecured loan. While a secured loan such as a home loan requires pledging an asset as a collateral.
• Borrower to Have a Healthy Credit Score: An applicant applying to an unsecured loan has to have a high credit score as this becomes the chief factor for the lender to approve a loan.
• Higher the Income, Higher the Loan Amount: Generally, a borrower with a higher income is eligible for a higher amount of loan sanctioned.
• Higher Rate of Interest: As the borrower of an unsecured loan pledges no collateral, the risk factor to a lender is high. Therefore, the lender charges a higher rate of interest.
• May Require a Co-signor: In case the borrower does not have the required credit score, lenders will need a co-signor. A co-signor takes the legal responsibility to repay the debt if the borrower defaults.
• No Loss of Any other Asset: If a borrower defaults, the lender cannot take possession of any of the borrower’s assets. The lender can however recover the dues through a collection agency or sue the borrower.
• Smaller Loan Amount: Lenders generally sanction a lower amount for an unsecured loan. This is because every lending institution typically has a mandate as to how much it can lend without a collateral.
• Medium-term Repayment: The repayment tenure for an unsecured loan is usually somewhere between 4-6 years.

Benefits of an Unsecured Loan

Collateral-free Loan: One of the main features of an unsecured loan is, no requirement for a collateral by the lender, thus makes borrowing relatively easy.

Simple Application Process and Quick Disbursal: Application for an unsecured loan is done online and processed in a short time. The speedy disbursal makes it a perfect financing option.

Less Stringent Eligibility Criteria: With a healthy credit score, steady income and just a few documents, a borrower can apply for an unsecured loan at a bank or a lending institution.

No End-use Restriction: An unsecured loan can be used for any purpose including paying debt, an international vacation, home renovation, higher education, weddings and other personal milestones.

Even if there are many banks and lending institutions offering unsecured loans, each will have slightly different features from the other. Also, the terms and conditions can vary depending on the lender’s policies and the borrower’s eligibility.

Hence, an applicant must always read the terms and conditions carefully before applying to any bank or lending institution.

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