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What are Unsecured Loans? Know the Types, Features, and Eligibility

Updated: Apr 22, 2022

Loans are lifesavers for many reasons. They can bail you out of difficult situations and at the same time provide a financial cushion for happy events of life. An unsecured loan means a loan that does not require you to pledge any collateral. This essentially means that lenders purely provide a loan based on your creditworthiness. Lenders check income flow, existing debt commitments, track record of previous payments, nature of employment, and some other factors to determine one’s eligibility for unsecured loans. Personal loans, student loans, credit cards, etc are some of the examples of unsecured loans. Unsecured loans are gaining increasing popularity for many benefits.

Types of Unsecured Loans

Loans are bifurcated into secured and unsecured loans. Unsecured loans, without a collateral or security deposit, can be bifurcated into credit cards and personal loans. Personal loans can be offered in the form of education loans, business loans, term loans, etc. A personal line of credit that has a credit limit that can be repaid and again spent on is a revolving loan. A term loan is a loan in which you pay EMIs till the loan is paid off at the end of its term. These types of loans could also be affiliated with secured loans, in which you pledge collateral.

Features of Unsecured Loans

Secured loans and unsecured loans have starkly different meanings and features. Unsecured loans are fully based on the borrower’s creditworthiness, rather than by any collateral like property, deposit, or any other assets. An unsecured loan stands in complete contrast to a secured loan. In a secured loan, a borrower pledges some type of asset as collateral for the loan. The pledged assets could be a home, car, jewelry, etc. These assets increase the lenders’ “security” for providing the loan. Examples of secured loans are home loans, loans against property and car loans.

1) Unsecured have a higher risk and hence a higher interest rate
Unsecured loans are riskier than secured loans for financiers. Hence unsecured loans require higher credit scores for approval. Assuming a borrower defaults on a secured loan payment, then the lender has an opportunity to repossess the collateral for recouping the losses. In contrast to this, if a borrower defaults on an unsecured loan, the lender has no chance to claim any property or asset. Since unsecured loans do not need pledging of assets and borrowers fully qualify based on their credit history and income, lenders bear more risk on unsecured loans. This is the reason why unsecured loans are typically offered at high interest rates. Moreover, the loan amount one can get is much smaller compared to that of a secured loan.

2) Co-applicant’s role in an Unsecured Loan :
Lenders may decide to approve or reject an application based on a borrower's creditworthiness. Lenders may also charge a higher interest rate to borrowers who are deemed risky as per their analysis. Depending on the eligibility and requirement of the primary borrower, in some instances, it is possible that lenders may allow them to add a co-applicant who must be a close family member with an excellent credit score and stable income. A cosigner’s role is to take on the legal obligations to fulfill a debt in case the borrower defaults on payments. The co-applicant can also help the primary applicant repay the EMIs, thus sharing the EMI burden.

3) Credit score is the Most Important :
A credit score is a deciding factor for these loans. Typically, borrowers should have a high credit score above 750 to be approved for unsecured loans and to receive a competitive interest rate.

Must Read :Minimum Cibil Score for Home Loan

4) Prepayment :
A credit score is a deciding factor for these loans. Typically, borrowers should have a high credit score above 750 to be approved for unsecured loans and to receive a competitive interest rate.

Eligibility for Unsecured Loans

The eligibility criteria for unsecured loans are usually highly stringent and may vary among lenders. Some of the basic criteria are:

  • You must be salaried or self employed with a stable income above a certain minimum threshold.
  • Your existing EMIs must be below 50% of your monthly income.
  • You must have a credit score of 750 or higher, with an excellent credit history.
  • You must have a minimum work experience between 1-5 years depending on the nature of your employment.

Comparison with Secured Loans

Thus, an unsecured loan may be a good choice if:

  • You need a small amount to meet some emergency need or fulfill shortage of funds towards achieving an aspiration (such as purchasing home appliances).
  • You have an excellent credit score and repayment capacity.
  • You can easily repay the loan within 1 to 5 years.

On the other hand, a secured loan is a much better option when:

  • You need a higher amount to meet a long-term need.
  • You need a longer tenure so that the resulting EMI does not strain your finances.
  • You need a loan to purchase an asset such as a home or a car.
  • You expect additional income such as bonus payments from work and wish to use such income towards making part-payments on your loan, enabling you to significantly shorten the tenure and overall interest payout.
  • You expect your monthly income to increase over the tenure of the loan, and thereby increase your EMI amount so that you can pay off your debt faster.

At Grihashakti, we offer secured loans against property with tenures upto 15 years to eligible borrowers at attractive interest rates. We also offer home loans at affordable interest rates with tenures upto 30 years so that you can purchase your dream home. Home loans and LAP availed at floating interest rates for non-business purposes are free of all foreclosure charges, and we accept part prepayments. Apply online today to know more.

Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.

SMFG India Home Finance Co. Ltd. (Formerly Fullerton India Home Finance Co. Ltd.)
CIN number: U65922TN2010PLC076972

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