Before you take up a loan, from banks or NBFCs, it is to be noted that proper thorough research is required. Banks have many loans available for people. But it is your decision as to what type of loan you require. They offer secured and unsecured loans. These loans are completely different from one another.
Unsecured loans are a type of personal loan which is taken by people and does not require any collateral or assets against the availed amount. If a borrower takes out a secured loan, such as a home mortgage or a vehicle loan, he or she is not required to keep the value of their assets while the full loan amount is not paid.
Unsecured loans can be obtained for a short period of time. It is used to cover the costs of going on vacation or upgrading to a better lifestyle. Unsecured loans are easily available and do not require extensive documentation. The only criteria that are looked at is your credit score.
How does an unsecured loan work?
Unsecured loans are easily available for people who need money for personal expenses. When you apply for an unsecured loan, your lender will only check your basic documentation. However, your credit and employment history are most important to ensure you can repay the loan. Lenders will only approve unsecured loans if a borrower has good credit.
Loans that are not secured have high interest charges as banks are at higher risk owing to the absence of collateral in comparison to secured loans. Additionally, there are various types of unsecured loans that have lower loan amounts and shorter repayment terms compared to secured loans.
Types of unsecured loans
There are many reasons why people take out loans. Let’s all understand the types of loans available for people
1. Revolving loan
It is a type of loan that allows the borrower to withdraw a specific amount and repay it back. After repayment, you can withdraw it again. This loan gives a specific credit limit to the borrower, and they are free to borrow as many times as they want, without affecting the credit limit. In a general sense, it is a flexible type of loan that can be repeatedly repaid.
2. Term Loans
Borrowers benefit from the flexibility of revolving loan payments. This type of loan is completely different from revolving loans. In contrast to revolving loans, term loans consist of fixed interest rate and tenure. People who are planning for future investments or to purchase fixed asset can opt for the term loans
3. Consolidation loan
As the name suggests, it is a type of loan that helps in the consolidation of existing loans. It is the most readily available loan for funding the accumulation of debts. Many people prefer loan consolidation to repay their debts.
There are other types of unsecured loans that are classified according to user needs.
1. Wedding loan
As part of Indian culture, a wedding is a grand event that requires preparation and expense. You can opt for a term loan where you’re funded for the entire wedding to make it a memorable one.
2. Vacation loan
People can opt for a term loan to finance their entire trip. The revolution loan may also be used to pay for side expenses such as food, shopping or other activities on the trip.
3. Agricultural Loan
In our country, the agriculture sector is still responsible for 50% of employment. Hence, there is a huge demand for loans. With the help of term loans, farmers can purchase land, machinery, irrigation channels, etc. However, a revolving loan can be used as a working capital requirement and expense.
What is eligibility for unsecured loans?
1. No assets can be taken against the loan:
One of the benefits of opting for unsecured loans is that it does not require the borrower to keep their assets aside as security for availing the loan.
2. An unsecured loan’s eligibility requirements are limited:
The borrower needs to submit basic documentation such as a salary sheet and other details to qualify.
3. Application process is easy:
Applying for unsecured loans is an easy task. In addition to the loan application, the borrower must attach his/her PAN card, Aadhar card, and salary slip. On the approval of the document, you will be eligible for unsecured loan which will be disbursed within a short period.
4. Ease of repayment:
Unsecured loans are the only type of loan that offers easy and flexible repayment methods. Borrowers choose a plan that is based on their income and expenses.
How to apply for an unsecured loan?
To opt for an unsecure loan, you will be provided with a form with basic details that need to be filled in by the borrower. Follow these steps when applying for an unsecured loan:
Check your credit score.
In order to obtain an unsecured loan, the borrower should have a credit score between 610 and 640. It is recommended to use an online credit score check before applying for a loan. If you check your credit score, you will have the opportunity to improve it before applying for a new loan
Review your budget
Once you review your credit score, you can then review your budget i.e., current income and expenses. It won’t be taken against your loan like a secured one will. However, late payments can negatively impact your credit score, so it’s important to identify your budget before taking a loan.
Submission of the application
Once you get approval of the loan, a loan application can be submitted in-person or online to your lender. Now-a- days you have many online lenders to whom you can submit the details online from which you can receive early confirmation.
Who should opt for unsecured loans?
Loans provide a convenient way to keep your finances afloat for people who don’t want to risk their assets against their loan.
Under an unsecured loan, you will be charged high interest rates to compensate for the asset risk. If you have a good credit score, you can improve your chances of getting low interest rates.
If you don’t qualify for an unsecured loan because of a poor credit rating, you can choose a secured loan as an alternative.