This is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stability. If borrowers default on the loan, they can face strict actions like a poor loan credit score, collection agents or legal actions.
The interest rates are usually higher than those of secured loans to compensate for no collateral requirement and because one cannot rely upon a security in case the borrower defaults.
Unsecured loans get their popularity for allowing relatively easy financial assistance to borrowers with distinct personal needs like planning a trip abroad. One can borrow small amounts without pledging a belonging. As opposed to the alternative like payday loans, these loans charge relatively lesser interest rates. Moreover, many online lenders of unsecured loans transfer the credit in just a day, adding more convenience.
What are the Features of Unsecured Loans?
Higher interest rate: As compared to secured loans, the interest rate is much higher for uncollaterized loans to compensate for not asking collateral. Normally, unsecured loans come with an interest rate ranging between 5-36%.
Access to Smaller amount of money: The loan amount is usually smaller. Every bank/financial institution has a limit till which they will offer a loan without any collateral. If borrowers need to borrow more money, they will need to produce collateral against the loan amount.
Tenure – Repayment can occur in installments or lump sump.
Types of Unsecured Loans
1. Personal loans
Unsecured loans can be great personal loans as well. For example, if you need money immediately and can’t take it from anybody around, you can go to the bank and ask for a personal loan. If the bank finds you to be a good fit on the scale of creditworthiness, they will offer you a loan without any collateral.
2. Educational/Student Loan
Educational loans are a popular example of unsecured loans since students find it difficult to finance higher studies such as a master’s degree. So you approach a bank, and they say that up to a certain extent, they can offer you a loan that doesn’t need any collateral.
But beyond that, they’d need security. So you work up the details, savings, and part-time jobs. Convinced that you’d manage the repayments, the bank then extends the loan.
3. Credit Cards
We don’t realize this as we enroll for a credit card, but it essentially is an unsecured loan. The credit card company sets a limit for your credit card usage. They also provide a time limit to pay off the credit amount. You’d only need to pay your dues within the stipulated time. However, if you don’t pay off the dues within the time limit, the company starts charging interest on the due amount.
The more you delay, the more charges continue to pile up. In fact, there have been many cases where some borrowers were constantly bothered by debt collection agents for recovery.