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A loan that doesn’t require any type of collateral is called an unsecured loan. It is approved based on the borrower’s creditworthiness and does not depend on their assets. Loans such as student loans and personal loans are examples of unsecured loans. Credit cards can also be considered unsecured loans.
Since this loan doesn’t require any asset to be kept as collateral, it is helpful for the borrower to have a high credit score. The onus is on the lender to decide whether or not to approve an unsecured loan. However, there are laws to protect borrowers from discriminatory lending practices.
After knowing what is an unsecured loan, it is time to understand how it works. Unsecured loans are instant personal loans. Sometimes, they are called signature loans. These loans are approved without any collateral. You do not need to pledge your assets or property. Rather, your lender evaluates your creditworthiness before approving your loan application.
A few parameters that play a significant role in helping you qualify for unsecured loans are your credit score & history. Your income also has a role in helping you achieve more favourable terms from your lender. Unsecured loans do not require any assets, unlike secured loans.
A secured loan requires you to pledge an asset that gets added as protection during times when you fail to repay your monthly EMI. In unsecured loans, any kind of default imposes penalty fines or added charges from your lender. Note that the list of unsecured loans (any type) are riskier for lenders. So, a borrow should have a higher credit score. Some lenders may let you apply with a co-signer if someone does not meet the requirements.
After knowing the unsecured loan definition, here are a few common unsecured loans examples of unsecured borrowing:
1. Personal loans: They are loans used to cover expenses such as weddings, home repairs, medical bills or other unexpected costs. The terms & interest rates may depend on your credit & income.
2. Credit cards: A credit card works as an unsecured line of revolving credit. You may make purchases up to a limit & pay off the balance over time or in full. Unpaid balance will accrue interest.
3. Student loans: Some student loans are unsecured. They help scholars manage education expenses such as tuition, books or living expenses. Some of these loans come with lower interest rates alongside simple repayment terms.
An unsecured personal loan may be required by a person for several reasons such as business, education, marriage, agriculture, etc. Unsecured loans are broadly categorized into 3 types of loans.
1. Revolving loans: A revolving loan is a flexible loan with a pre-approved limit that can be utilized multiple times within its tenure. In other words, it is a credit limit assigned to borrowers, wherein they can withdraw up to a certain amount, repay, and withdraw again. Such loans are ideal to help businesses with their working capital requirements and have variable interest rates.
2. Term loans: A term loan has a fixed tenure and interest rate. It is ideal for purchasing a fixed asset or making a long-term investment.
3. Consolidation loans: Due to such convenient access to financing, one can often accumulate some loans. They opt for a consolidation loan to repay these accumulated loans. Hence, a debt consolidation loan helps in consolidating all of one’s existing loans.
Types of unsecured loans may also be categorized based on their end use:
4. Business loan: Such loans are offered to businesses to help them invest in infrastructure or handle their working capital needs. A business loan is similar to a revolving loan, except there is an interest on the outstanding amount. Receivables financing is one of the most common mediums of financing a business.
5. Vacation loan: There may be some loans packaged as vacation loans. A term loan can be used to finance the trip. For expenses, during the trip such as shopping, eating, etc. a revolving loan may be used. A credit card may also be used for your vacation expenses.
6. Wedding loan: A wedding is an important event for Indian families, and they leave no stone unturned in its preparation. However, marriage expenses can put a huge dent in your savings. A wedding loan is a flexible financial product that can help you manage your wedding expenses.
7. Home renovation loan: A home renovation loan can be availed to refurbish your house. Usually, a home renovation loan allows several purchases and modifications, but not the purchase of furniture and appliances.
8. Top-up loan: Borrowers may often require additional financing over an existing loan. This additional loan amount is known as a top-up loan. In this case, borrowers can club the previous loan and the additional loan amount into one and pay a single monthly installment instead of two separate payments.
9. Bridge loan: A Bridge loan is meant for the short-duration fund requirements of a person. The term of bridge loans is usually under a year.
10. Consumer durable loan: With the advent of technology and dependence on digitization, the purchase of gadgets and appliances has become inevitable. A consumer durable loan aids the purchase of gadgets and appliances. While a term loan may suffice for consumer durables, some opt for revolving credit, to get the freedom of utilization and repayment of the funds.
Secured loans require you to offer collateral for security against your inability to repay the loan, whereas unsecured loans allow you to borrow the money immediately based on your creditworthiness.
You may put up something valuable such as your property, gold, high-end collectibles, stocks, mutual funds, insurance, etc. as collateral for a secured loan. Some examples of a secured loan are - loan against property, car loan, home equity.
To avail an unsecured personal loan, you must have a high credit score. Examples of an unsecured loan include credit card, personal loan and student loan.
A few lenders offer flex loans. These loans are a type of revolving credit. It usually comes with a higher rate of interest. These are available to people who have no credit history or a negligible credit history. They serve as an option for people who are in need of funds quickly.
On the other hand, payday lenders or companies offer merchant cash advances. The lenders do not issue any secured loans since they do not rely on assets like homes or cars or any other collateral.
Note that payday lenders allow people to offer a postdated check or authorise an automatic withdrawal from the bank account. On the other hand, online cash advance providers need businesses to share a part of their daily sales via a payment processor (PayPal, for example).
Here are the differences between payday loans & unsecured loans -
| Feature | Unsecured Loan | Payday Loan |
|---|---|---|
| Collateral | No collateral | No traditional collateral; repayment secured by postdated checks or auto-debit |
| Loan Amount | Typically higher (thousands to lakhs) | Usually small, short-term amounts |
| Repayment Period | Months to several years | Due by next paycheck (very short term) |
| Interest Rates | Moderate to high, depending on credit score | Extremely high, often much higher than unsecured personal loans |
| Eligibility |
Based on credit score, Income & Repayment history |
Available even with poor or no credit history |
| Use of Funds |
Can be used for larger expenses like: Medical bills, Home repairs & Debt consolidation |
Covers urgent cash needs until payday |
Want to get funds quickly? Do you prefer not to risk your property or assets? It is time to consider an unsecured loan if you do not want to pledge your assets.
Here are the types of candidates who can apply for this type of loan-
1. Planning a large purchase: Opting for a loan can feel overwhelming. But when there is a major expense ahead (like a wedding or home project), an unsecured loan offers the best financial support.
2. Strong credit profile: A decent credit score makes it simpler for you to qualify for unsecured loans. It may offer lower interest as well as better repayments.
3. Stable income: Collateral might not be required. Thus, lenders check your income to ensure you repay on time. Your monthly income ensures that you meet the requirements while avoiding any missed installments. That may damage the credit history.
4. Debt consolidation: Note that unsecured loans are used to combine multiple debts into one. It simplifies repayment while reducing the overall borrowing cost in case the new loan has a lower interest rate.
There are pros and cons of unsecured loan as well as secured loan. Let us throw some light on each.
First of all, your assets can be seized if you fail to pay off your secured loan, which makes them riskier than unsecured loans. In addition, you are still required to pay interest on the loan based on your creditworthiness.
Since an unsecured loan is given based on your creditworthiness instead of against collateral, the interest rate might be higher than a secured loan.
Secured loans are easier to obtain than unsecured loans since the latter is riskier for the financial institution.
Secured loans have a longer repayment period compared to unsecured loans.
In addition to being easier to get, the contract in case of a secured loan is usually more favorable for the borrower.
Overall, secured loans are offered on better terms than unsecured loan.
Personal loan interest rates usually begin at 10.25% p.a. but some public sector banks offer lower interest rates. Private sector banks such as HDFC Bank, Axis Bank, and ICICI Bank offer the lowest personal loan interest rates beginning from 10.25% p.a.
The personal loan interest rate offered to you will depend on your credit score, monthly income, job profile, etc.
If you are seeking the best-unsecured loan interest rate, you should compare all banks personal loan interest rates before making a choice.
Examples include personal loans, credit cards and certain student loans. The unsecured loans do not usually need collateral. Their approval depends on your creditworthiness as well as income stability. You may use them for expenses such as weddings, medical bills, or any other reason. No assets are pledged. Thus, lenders charge higher interest rates compared to secured ones.
The eligibility for an unsecured loan usually depends on your credit score. Besides, your DTI ratio as well as your monthly income also play crucial roles. Your lender may want assurance from your end that you can make payments on time without any collateral. A few lenders also consider co-signers in case you have a weak credit score. These are certain eligibility criteria you need to meet.
Unsecured loans might be excellent when you are in need of quick funds without pledging any assets. These loans can be used for personal expenses or debt management. Overall, if you have good credit and can meet the requirements, it can be a great option for you during emergencies.
Opting for an unsecured loan does not hurt your credit score automatically. You need to pay on time to improve your credit score. Note that any kind of defaults or late payments can lower your score. A few lenders rely on credit history before approving any loan. Repaying the money responsibly on time protects your credit while increasing your forthcoming borrowing opportunities.
Missing a payment may result in increased interest or late fees. It also has an impact on your credit reporting negatively. Accounts might be sent to collection & it results in legal actions taken by the lender. Lenders cannot seize assets when it comes to unsecured loans. However, late payment definitely damages your credit score & lower chances of future loan approvals.
Unsecured loans are offered by online lenders, banks, or financial institutions. Credit card companies, as well as government programs, may offer them in case of student loans. Lenders set their requirements, including repayment terms alongside interest rates. They base the decisions on your income & borrowing history.
Interest on unsecured loans is calculated using the loan’s annual percentage rate on your outstanding balance. You may use online personal loan eligibility calculators to estimate your monthly payments. A few parameters influence the rate, such as credit score, loan amount and repayment term. You need to understand how interest accrues to help plan repayment while avoiding unnecessary financial problems in the future.
An unsecured loan is a better option when compared to secured loans. The reason is that it does not include any collateral. You do not need to take the risk of your assets if repayment becomes difficult once in a while. Besides, it has a speedier approval timing. The interest rate might be higher. However, it ultimately offers peace of mind given that there’s no requirement for collateral.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
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