What are unsecured loans?

Types of Unsecured Loan, Key Benefits, Features & more

Loans are a blessing for the people who require money to run their business. Although there are various ways of borrowing money, the most popular ones are secured loan, and unsecured loans. People who do not have any asset to pledge against the money borrowed can go for unsecured loans.

It is a type of loan that does not require any collateral or security. In other words, the lender will lend money solely based on your credibility or creditworthiness. He will not assess your assets or securities to sanction you a loan. However, the lender is the last person to decide if he wants to approve the loan or not.

Some examples of unsecured loans are student loans, credit cards, and personal loans. Keep reading on as we outline the basics of unsecured loans that every borrower should know before applying for one.

How to Apply for an Unsecured Loan?

Are you planning to go for an unsecured loan to maintain liquidity in your business? Here is the process to apply for it.

• Company Website – You see, every top lender in the market has an official website to guide the borrowers. You can also check the official website of your bank and apply for an unsecured loan online.
• Loan Aggregators – Several third-party loan aggregators, are present online to help the borrowers find the best deals available in the market. It allows you to compare the various loan products, interest rates, processing fee, and repayment terms.
• Branch Office – People who are not much into technology and online banking can personally visit the lender's office and enquire about the loan. You can meet the executives personally and understand the terms and conditions of the unsecured loans.
• Documents – Once you have cleared all your doubts, you can fill in the loan application form, submit papers, and wait for the lender’s approval.

What are the Key Factors that Influence Unsecured Loans Approval?

As we all know, unsecured loans do not require any collateral or security deposits. But specific other parameters like job status, credit history, income, etc., are considered while sanctioning an unsecured loan.

• Credit History – You see, the lenders would like to make sure that all their borrowers are financially sound and disciplined enough to repay unsecured loans on time. The higher the credit score, the higher are your chances of getting your loan application approved.
• Employment Status – The lenders would be interested in knowing your current employment status. They would also enquire about your monthly source of income. If you own a business, you will be asked to prove your business ownership. And if you are a salaried person, you might need to submit relevant documents to prove it.
• Income – Second thing that lenders will check while analysing your loan application is your current income status. It is done to ensure that the borrower has reliable income sources to repay the loan amount on time.

Key Benefits and Features of Unsecured Loans

Why should people apply for unsecured loans? Keep reading on as we outline some of its key benefits and features.

• Convenient and Easy Loan Application – You see, an unsecured loan comes with a seamless application process. Borrowers can apply for it online, sans any frequent branch visits.
• Higher Rate of Interest – The rate of interest on unsecured loans is higher than the regular loans. Moreover, the interest rate will depend on the annual or monthly income of the applicant.
• Quick Turnaround Time – The best part about unsecured loans is that it comes with a rapid turnaround time. If everything goes well, borrowers can expect loan approval in just 24 hours. It makes unsecured loans a handy financial tool in times of monetary crisis.
• Loan Amount is Directly Proportional to your Income – The golden rule of unsecured loans is that the higher the income, the higher your loan amount will be. In other words, the lender will sanction unsecured loans in proportion to your annual income.
• No Collateral– Under unsecured loans, your assets are safe in case of default in repayment. It is the reason why more and more people prefer to take these loans these days.
• Minimum Formalities – The documentation requirements for unsecured loans is minimal. Moreover, the majority of lenders allow online submission nowadays, making these loans convenient and easy.

What is the Eligibility Criteria for Unsecured Loans?

The eligibility criteria for getting an unsecured loan is quite easy:

• The loan applicant should have a stable job and relevant documents to prove it.
• Salaried applicants should have a minimum of 2 years of working experience.
• Self-employed applicants should have a minimum of 5 years of earning tenure.
• The age limit for salaried applicants is 21 to 60 years. At the same time, this limit for self-employed applicants is 25 to 65 years.
• Details of pending EMIs are also considered while sanctioning the final loan amount

Documents Required

For Salaried Applicants:

• Duly filled application form
• Passport-sized photographs of the applicant
• Residence proof like passport, utility bills, etc.
• Salary proof of the last 3 to 6 months

For Self-Employed Applicants:

• Office address details
• Processing fee cheque
• Proof of business continuity
• Identity proof like voter ID, driving license, PAN card, or passport
• Duly filled application form
• Passport-sized photographs of the applicant
• Residence proof like passport, utility bills, etc.
• Income statements for the last 3 to 6 months

What are the Types of Unsecured Loans?

There are different types of unsecured loans like:

• Personal Loan – The borrower need not give a reason to apply for a personal loan.  He will be required to repay the loan in monthly instalments over a fixed period. However, both NBFCs and banks offer personal loans.
• Signature Loan – It is one of the simplest forms of an unsecured loan. As the name goes, you just need to sign a document to obtain a loan. The borrower’s signature will be the sole security for this loan.
• Instant Loan – This kind of loan is offered to salaried employees. The amount is relatively small and has to be repaid once the borrower gets his next salary. Furthermore, the rate of interest for an instant loan is much higher than the regular loans.
• Education Loan – Borrowers take an education loan to manage the expenses of their academic courses. The borrower also enjoys a moratorium period in which he can choose not to pay anything to the lender. Flexible repayment modes and subsidies on interest rates are the highlights of this kind of unsecured loan.

Takeaway

So, this was all about unsecured loans. It is one of the most convenient loans so far. You can use these loans for your business expansion and office renovation. Similarly, on personal fronts, you can use the amount for your medical expenses and education.

However, make sure you have a good financial cushion to repay it on time. Any default or delay in repayment can land you in a legal soup. Last but not least, understand all the terms and conditions of an unsecured loan before applying for it. Good luck.

Also read:

1) What is Home Loan? A Complete Guide.
2) How does No Cost EMI work?
3) What is the Difference Between Secured & Unsecured Loans?
4) What is Business Loan? A Complete Guide.

FAQs

Q. What is the tenure of unsecured loans?

Ans. The majority of the banks offer a maximum repayment tenure of 5 years for unsecured loans. However, this tenure can differ from lender to lender. The borrower should connect with his bank branch for more details.

Q. Can I apply for an unsecured loan online?

Ans. Yes, nowadays, the majority of the banks offer online loan application facilities for the borrowers. For more details check your bank’s website.

Q. Where can I use the unsecured loans?

Ans. You can take unsecured loans for both business and personal use. As far as personal reasons are concerned, you can use this amount for a house renovation, medical expenses, and so on. Whereas, people in business can use it for tender payments, business expansions, etc.

Q. What happens when you fail to repay the loan?

Ans. In this case, the lender has the right to collect the pending amount through a collection agency or sue you in the court of law.