Unsecured Loans

UNSECURED LOAN

An unsecured loan refers to a type of loan where you do not need to keep any collateral security like jewellery or any other kind of asset with the lender. Loan is sanctioned on the basis of your previous records and your credit score. These are generally short term loans (6 months or even less) and are only taken during emergency situations. Personal loan or business loan are general examples of unsecured loans. When such a loan is taken it involves a high amount of risk on the part of the lender, if the applicant fails to pay the money there is no collateral security or any kind of deposit which can be used to repay the amount.

Characteristics of an unsecured loan:

  • The first and foremost feature of an unsecured loan is that, there is no kind of collateral security attached making borrowing money easier for the borrower and riskier for the lender.

  • Secondly, the interest rates on unsecured loans is higher than other secured loans for the sole reason that such loans require high risk involvement for the lender. Thus, interest rates are kept high so that lenders can protect themselves.

  • Thirdly, people generally apply for an unsecured loan because they can obtain cash very quickly. However, before the bank gives the loan to anyone the person has to have a good credit score and a history of making payments on time.

  • Lastly, whenever an unsecured loan is sanctioned to a person, the parties usually have a verbal agreement of the terms and conditions there is no collateral security attached making it unenforceable.

Advantages

  1. Easy Availability- The most vital advantage of taking an unsecured loan is that it is very easy to get an unsecured loan as there is no kind of collateral which has to be given for getting an unsecured loan.

  2. Negligible risk for the borrower- The borrower has no risk involvement as neither his home nor any of his assets will be taken in case he is unable to payback. Making it easy for the people who have homes but do not wish to risk it.

  3. Less of documentation- An unsecured loan does not require many formalities to be fulfilled making it quick to get. Banks generally ask for the basic information of the borrower for example ID proof, Address proof etc.

  4. No middlemen- The loan amount is directly given to the borrower without any involvement of a third person.

Disadvantages

  1. High interest rates- As there is no collateral security attached the interest rates on unsecured loans are higher so as to give the lenders some sort of security.

  2. Good credit rating is mandatory- Lenders prefer giving loans to the people who have a good credit rating because such loans are risky on the part of the lender.

  3. Lack of flexibility- When you take out an unsecured loan you agree to pay it back in instalments over a given period of time.

 

 

 

 

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