Unsecured loans are the loans that no collateral or security and offered purely on the basis of credit score and credit history of the borrower. Lenders find unsecured loans unsafe as there is no collateral to recover the amount in case a borrower defaults the loan, therefore, unsecured loans are offered at higher interest rates.
Unsecured loans are preferred by those people who do not wish to seize their property or any asset maybe a car with the bank. Since there is a certain risk involved in keeping the property or any possession, people prefer unsecured loans over secured loans.
Features and benefits
High interest rates: Since there is no security or collateral, this loan is offered on higher interest rates.
High credit score and credit history: To ensure safety, this loan is offered to people with high credit scores and a remarkable credit history. The credit score tells the customers’ repayment capacity and also tells about his repayment behaviour within the due date.
Shorter loan tenure: Since the loan is unsecured, it is offered for a shorter duration to minimise the risk. Most banks offer unsecured loan for a duration if not more than 5 years.
No security: Since it is an unsecured loan, it doesn’t require any collateral against the lending amount.
Easy loan application: Unsecured loans are comparatively easy depending amount the type of unsecured loan the document requirement varies and therefore it is an easy process.
Types of unsecured loan
Student loan: Also known as education loan, this is a loan to pay the expenses or fees affiliated to your academics. It can be a hostel fee, tuition fee, college fee or any complete course fee. The benefit of this loan is that the student doesn’t have to pay EMIs immediately since he/she is not capable of pay as he/she is not working. After the decided duration, the EMIs start that has to be paid by the student.
Credit card: A credit card is also a type of unsecured loan that has a set credit limit. The credit amount can be used and is to be paid later before the due date along with the interest on the amount used. It is a revolving credit as it can be used again. Using beyond the set limit costs extra that should be paid at the time of repayment.
Personal loan: Being the most common type of loan, it is a loan taken to cater a personal need for which the reason may not be disclosed. This loan is offered for a fixed duration and has fixed EMIs to make the repayment within the tenure. Prepayment may be possible with some extra charges applicable.
Signature loan: Signatures loans are offered on the basis of signature. Your authentic signature serves as the security. The monthly instalments go as per the process and the terms decided, however, your signature is given as a surety to the bank that the loan will be repaid.
Payday loans: Loans that are borrowed by an individual for an emergency. This type of loan is usually a small amount and is to be paid on the day the borrower received his/her salary. Interest charged on payday loan is quite high.
Peer to peer loan: As the name describes, this is a loan that can be taken from an individual and not from an authorised bank or a non-banking corporation. This loan can be availed online, where you put a request and the interested lender can reach you for the same.
High credit score
Unsecured loans are majorly offered on the basis of credit scores and credit history. It is essential to maintain a high credit score in order to avail easy loans.
A regular employment is important for unsecured loans. A professional employment of 2 years and self-employment of 5 years is required to get this loan.
Age plays an important role in getting an unsecured loan. Minimum age is 21 years to apply for a loan, however, the age criteria might vary for different banks.
Your bank balance or overall financial position plays an important role to determine your loan eligibility. The bank estimates your expenses to find out whether you will be able to take out the monthly instalments. If the banks have a slight sense of doubt, they would not grant the loan.
If a borrower is already paying other EMIs, that is also considered by the bank and contributes in deciding whether the loan has to be given or not.
Major factors contributing to unsecured loans
One of the major factors leading to approval of unsecured loans is credit score. It is a major deciding factor in the approval of loans.
Income is another factor that decides unsecured loan approvals as stable and high income means a safety to the lender for repayment. The lender feels secured if the borrower has a capacity to pay and also pays in time.
Regular income means stable employment and safe lending as the capacity for repayment of the borrower can be decided from his employment status.
- ID proof – Passport, Driving license, Voter ID, Aadhar
- Residence proof – Phone or electricity bill, any government issued document having the current address.
- Bank statements – Last 6 months statements
- Income proof – salary slips for last 3 months, TDS document, certified income document
- Proof of business – Document showing the continuity of business (for self-employed)
- Processing fee cheque (for self-employed)
- Office address proof (for self-employed)
- Completely filled application form with passport photos
- Differences in secured and unsecured loan
|Secured loans||Unsecured loans|
|Requires collateral||No collateral required|
|Low interest rates||High interest rate|
|Greater loan tenure||Shorter loan tenure|
|Less risk of default||More risk of default|
Chances of rejection are on the following grounds
This is one of the major parameters to reject the loan. If the borrower’s credit history is bad, his/her loan will definitely get rejected.
Doubtful repayment capacity
If the lender is doubtful about the repayment capacity of the borrower. The loan will definitely get rejected. To give the surety, the borrower should itself offer a small collateral that would win the trust of the lender.
If the amount request on loan is quite high. It is most likely that the loan will get rejected as the lender would be doubtful. Especially if the lender estimates that the income is not sufficient to pay the monthly instalments.
In order to avail loans credit score and history plays an essential role and becomes a deciding factor to whether the loan is to be granted or not. It is important for a borrower to maintain his/her credit score. An unsecured loan is an easily available option at the time of need provided you have maintained your score and fulfil the eligibility criteria.