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    Unsecured Loans

    Loan is a financial instrument in which one party offers money to another with the condition that the amount will be repaid within a certain period of time along with a mutually agreed-upon interest. Loans can be of two types - secured and unsecured. While secured loans are a very popular loan category, unsecured loans are slowly gaining momentum due to their quick turnaround time and convenient nature.

    In today’s time of globalization and raised standard of living, there are various financial needs for which customers require quick and convenient credit. Unsecured loans are gaining popularity as great credit instruments. Various private and public sector banks along with several non-banking financing companies (NBFCs) offer unsecured loans to their customers. Fierce competition in the financial sector has led the banks to ease the process of obtaining unsecured loans.

    What are unsecured loans?

    Unsecured loans, as indicated by their name, are loans that are not attached to any kind of collateral or security. They are called unsecured because the bank does not have any collateral to fall back on in case a customer defaults. For example, they cannot use your LIC policy or sell your house to recover the loan amount if you fail to repay your loan.

    Unsecured loans can be segregated into two broad categories namely personal loans and business loans. While personal loans are funds borrowed for meeting personal financial needs, business loans are taken by customers who want extra cash to be utilized in fulfilling fulfil business needs like expansion, setup, etc.

    Before granting you an unsecured loan, lending entities look at the customers’ credit history and assess the risk associated with it. The rate of interest offered is, thus, a reflection of the level of risk involved with a particular customer.

    Types of unsecured loans

    Unsecured loans are offered in a wide range of categories. All these categories of loans are provided to an individual without asking him or her to furnish a collateral or a security. There are many types of unsecured loans. Let us take a look at some of the common forms of unsecured loans:

    • Signature loans: This is the simplest type of an unsecured loan. As the name suggests, you only need to give a signature for obtaining this loan. As a borrower, your signature will serve as the sole security for this loan wherein you will promise your lender to repay the entire loan on time without fail. You can acquire a signature loan from a bank or a non-banking financial company (NBFC). It is a loan that can be paid in installments wherein you will have to pay back on a monthly basis until the debt is completely paid back. You can obtain a signature loan in the form of a personal loan. It will also assist you in boosting your credit score very easily.
    • Personal loans: A personal loan is the most common type of unsecured loan. When you apply for a personal loan, you do not have to mention the reason for taking the loan. This is also an installment loan wherein you repay the loan in equated monthly installments (EMIs) over a fixed tenure. You may also prepay a personal loan if your lender allows it. You may be asked to pay a prepayment fee. Both banks and NBFCs offer personal loans through online and offline methods.
    • Education loans: An education loan or a student loan refers to a loan that can be utilised to pay your fees for an education course. The best feature of education loans is that one can enjoy a moratorium period during which a borrower does not have to pay anything. It is also known as a holiday period or a waiting period. A student applicant can also enjoy subsidies on interest rates and flexible repayment modes. These loans can be taken to pay hostel fees, library fees, mess fees, course fees, and other fees related to one’s academic course.
    • Credit cards: A credit card is a revolving form of credit. When you take a credit card, you will be able to pay for products and services according to your financial needs on a credit basis. However, you will not get any large amount of money at the beginning just like how you get with an installment loan. You will be able to borrow a certain amount only when you require it. You will be given a credit limit and you will be able to spend within that limit only. If you exceed your credit limit, you may be asked to pay some extra charge. The rate of interest charged by credit cards is pretty high when compared to other forms of unsecured loans. You will have to be very careful while using a credit card and should always make sure you to pay all your bills for a credit cycle on time.
    • Peer-to-peer loans: This type of loan is provided by an institution other than conventional lenders such as banks or NBFCs. You can take a loan from individuals or your peers. These loans typically follow a fixed-rate interest system. This is an easier form of obtaining loans. The eligibility requirements for peer-to-peer loans are less stringent. The rate of interest for these loans is competitive in nature.
    • Payday loans: Payday loans refer to relatively small loans that are offered to a salaried individual, wherein the loan will be repaid whenever the loan applicant gets his or her next salary or wages. The rate of interest charged for payday loans is quite high. It is also known as a salary loan, cash advance loan, or payroll loan.

    Eligibility criteria for unsecured loans

    The list mentioned below includes the eligibility criteria that should be met in order to qualify for an unsecured loan.

    • Applicant should be in a stable employment. Regular employment record plays a vital role in making a customer eligible for unsecured loan
    • Salaried individuals with a minimum 2 years of professional service or a self-employed person with a minimum 5 years of earning tenure
    • Age of the applicant should be above 21 years and below 60 years for salaried borrowers, and between 25 and 65 years for self-employed individuals
    • Current financial statements play a crucial role in determining loan eligibility, therefore, should be provided during the loan application process
    • Credit history of customers is also taken into account and is instrumental in determining eligibility, rate of interest, and loan amount
    • Pending EMIs from other loans are also taken into consideration by the lending bank for determining your loan amount eligibility

    Documentation required for taking an unsecured loan

    Documents required by the lending bank for approving unsecured loan to customers are listed below. This list includes documents required for both salaried and self-employed individuals.

    Documents required for salaried applicants:

    • Duly filled loan application form
    • Couple of passport-size photographs of loan borrower
    • Identity proof – passport, driving license, voters ID, PAN card (any one proof)
    • Proof of residence – utility bill, passport, etc.
    • Salary slips for last 3 or last 6 months

    Documents required for self-employed applicants:

    • Office address proof for self-employed individuals
    • Proof of continuity of business
    • Processing fee cheque
    • Duly filled loan application form
    • Couple of passport-size photographs of loan borrower
    • Identity proof – passport, driving license, voters ID, PAN card (any one proof)
    • Proof of residence – utility bill, passport, etc.
    • Salary slips for last 3 or last 6 months

    Unsecured Loan Interest Rates

    Since unsecured loans are offered by banks to customers without any requirement of collateral or security submission, hence these loans generally come at a higher rate of interest and lower loan amounts as compared to any other secured loan. The eligibility criteria for these types of loans are also more stringent than secured loans. Generally, the loan tenure for unsecured loans is a maximum of 5 years during which the borrower is expected to repay the full loan amount along with the applicable interest amount.

    Unsecured loans are taken for short-term finance needs or for building a good credit score. Banks negotiate interest rates on unsecured loans with customers based on several parameters like loan amount, annual income, employment status, employer’s profile in case of a salaried professional, and so on.

    Features and benefits of unsecured loans

    Unsecured loans offer various features that are unique to this financial instrument. Listed below are some of the most striking features of unsecured loans.

    • Easy and convenient loan application Unsecured loans generally have an extremely easy and convenient application process. Customers are not required to visit the branch of the lending bank frequently in order to avail this type of a loan. These loans are also available through online application and are very easy to avail.
    • Quick turnaround time Banks offer quick and speedy turnaround time on unsecured loan applications. These loan applications are processed fast and sometimes even under 24 hours. This makes unsecured loans an extremely handy financial tool in times of an emergency monetary crisis.
    • Rates of interest are usually high Since borrowers do not need to provide any collateral to avail an unsecured loan, these loans are offered at a higher rate of interest than other regular loans. The interest rate on these loans is also depends on the monthly or annual income of the loan applicant.
    • No collateral required Customers do not need to submit any collateral as security to the lending bank to avail unsecured loans. Your assets are safe with you in case you fail to repay this type of a loan. Due to this unique feature, unsecured loans are becoming increasingly popular among customers.
    • Higher the income, greater the loan amount The more the income of the applicant, the higher is will be the loan amount that banks offer as an unsecured loan. This means that a customer can avail unsecured loans in proportion to his or her monthly or yearly income.
    • Minimum documentation Unsecured loans require minimum documentation and, therefore, have a hassle-free loan application process.

    Difference between secured and unsecured loans

    Learn about the difference between unsecured and secured loans below:

    Particulars Secured Loans Unsecured Loans
    Collateral This type of loan is tied to a collateral that needs to be provided during the application process. Customers do not require to provide any collateral in order to avail this loan.
    Impact at loan default Borrowers of this loan can lose their assets in case of a default. Since no collateral is provided, the borrower is not at risk of losing any asset in case he or she defaults during the repayment.
    Risk Risk of default is significantly lower than unsecured loans for these loans. No collateral submission translates to a higher risk of default in case of this loan.
    Interest rates Interest rates for this type of loan are lower than unsecured loans since risk is less. Due to high risk, rates of interest for these loans are higher compared to secured loans.
    Purpose of loan This loan is secured when the end usage of loan amount is discreet such as during a car, two-wheeler, or house purchase. These types of loans are availed when the end usage is not clear such as house renovation, medical bill payment, wedding expenses, etc.
    Loan tenure The repayment tenures for these loans are generally greater than that of unsecured loans. The repayment tenure for this kind of a loan is generally less.

    Banks offering unsecured loans in India

    Most Indian banks, private as well as public, offer unsecured loans to customers. Among these, the most popular banks are the State Bank of India, ICICI Bank, HDFC Bank, Bank of India, Axis Bank, Kotak Mahindra Bank, Standard Chartered Bank, etc. All these banks have similar eligibility criteria and offer interest rates that are dependent upon the monthly income of customers.

    How to get your unsecured loan sanctioned by your lender

    When you decide to apply for an unsecured loan, you should be prepared to put in some extra effort in order to get your loan approved. Unlike secured loans, unsecured loan applications have some more stringent requirements. When you approach a lender for a secured loan, you will have to submit a security or collateral, and your loan application will most likely get accepted. On the other hand, when you go for an unsecured loan, you will not be furnishing any form of security. Hence, the lender faces higher risk with this type of loan. Therefore, as an applicant, you could keep a few important points in mind to make sure your loan application gets approved.

    A bank or an NBFC will assess certain key aspects before deciding to give you a loan and which includes your income, credit history, job status, etc.

    • Credit history: Your lender will take a look at your previous credit behaviour in order to understand your repayment ability. They like to make sure that their borrowers are financially disciplined enough to repay loans efficiently. Your lender will also check your credit score to get some clarity. When you want an unsecured loan, your credit score will need to be high. If you have never applied for any credit or if you have borrowed very little credit in the past, then you can take time to develop your credit score. In case you have a poor credit score, you need to enhance it, and then apply for an unsecured loan. You can incorporate strict measures in your overall lifestyle in order to reduce your various expenditures. You may also bring about changes in your life to make sure you do not spend unnecessarily. Being financially disciplined is the key to boosting your low credit score. With a high credit score, you have more chances of getting your unsecured loan application approved.
    • Income: When you apply for an unsecured loan, you do not offer any collateral. You can only prove to your lender with valid documents that you will be able to pay back your loan. Lenders typically check your income to get an idea if you will be able to repay conveniently. Many lenders set a minimum income criterion to make sure that individuals with low income do not apply for their loans. They also like to know if you have a stable income. You will be asked to provide documents such as latest payslips, offer letter, income tax returns, and bank statements so that your lender can verify your income details. They will also be able to observe if the loan will negatively affect your existing expenses.
    • Employment status: Your lender will be interested in knowing if you are a salaried employee or a self-employed applicant. They would also like to know if you have a steady source of income on a monthly basis. If you are a salaried applicant, you would have to provide your offer letter from current organisation, relieving letter from previous company, payslips, etc. to  verify your job status. If you are a self-employed individual, you will most likely be asked to show proof of continuity of business and proof of business ownership.

    What can be done if your unsecured loan application does not get approved?

    When your much-awaited unsecured loan gets declined by your lender, you would be deeply disappointed. However, you do not have to give up on your loan. You can try doing something interesting in order to get your funds:

    • Go for a smaller loan: In case your unsecured loan has been rejected due to your debt-to-income ratio, you could try applying for a lower amount. This way, your EMIs will also be low. You can try meeting your requirement with a lower amount of money.
    • Take the assistance of a co-signer: You can apply for the loan again with the help of a co-signer or a guarantor. This particular party will take the responsibility of repaying your loan in case you fail to pay your loan on time. Your lender will have a sense of assurance that your guarantor will help you in clearing your loan without letting you default it.
    • Submit a collateral: Unsecured loans are usually offered without asking for any collateral. However, in case your loan application got rejected due to poor credit score or low income, you could present an asset as your collateral. When you secure your loan, your lender may be ready to provide you with a loan.
    • Work on your credit score and reapply: If you feel that your unsecured loan is denied to you due to your bad credit score then you could implement some methods to raise it. Make sure you do not try to apply for too many loans or credit cards as this can affect your credit inquiry letter. You need to repair your credit score step by step, and check it on a regular basis. You also need to work hard to pay all your bills promptly.

    Unsecured Loan FAQs

    Can a self-employed person take an unsecured loan?

    Yes. Unsecured loans can be taken by self-employed customers too.

    What is the maximum loan tenure offered on unsecured loans?

    Most banks offer a maximum loan repayment period of 5 years for unsecured loans. However, this can vary from lender to lender. Therefore, it is advisable that borrowers of this kind of a loan should always learn about the maximum loan tenure offered by the lender before he or she decides to opt for this scheme.

    What are the purposes for which unsecured loans can be availed?

    Unsecured loans can be taken under two categories namely personal loans or business loans. An unsecured loan that is taken to meet any personal financial need like medical expense, house renovation, etc. is called a personal loan. Whereas, an unsecured finance sought for business purposes like expansion of business, payment of tender, etc. is called a business loan.

    Can I apply for an unsecured loan online?

    Yes. Many banks provide the option of online application of unsecured loans.

    Do I need to pay a processing fee for unsecured loan?

    Yes. Banks charge a processing fee for unsecured loans. This is generally dependent upon the discretion of the concerned bank. bank’s discretion.

    How many days does a bank normally take to disburse an unsecured loan?

    Unsecured loans are mostly granted faster than regular loans. Hence, loan processing may take a minimum of 24 hours to a maximum of 7 days depending on the bank.

    Can I close an unsecured loan prematurely?

    Yes. Unsecured loans, like other regular loans can be closed prematurely. However, this will depend upon bank’s policy and may attract a pre-closure fee.

    How can I make sure that my unsecured loan application gets approved?

    Applicants can follow the steps mentioned below to ensure that their unsecured loan applications do not get rejected:

    • Bills and existing loans should be paid on time to maintain a high credit score.
    • In case a customer has a low credit score or has never applied for any credit before, he or she can build his/her credit score or enhance it over time.
    • Individuals should ensure that their earnings match or exceed the minimum income criteria of the concerned lender before applying for an unsecured loan.
    • Having a stable and regular source of income also increases the chances of an unsecured loan application getting approved.
    I am a salaried professional. What are the documents I will need to submit to get an unsecured loan?

    The list of documents for a salaried employee to avail an unsecured loan are mentioned below:

    • Few passport-size photographs of the applicant
    • Duly-filled application form
    • Proof of identity such as Voters ID, Driving Licence, PAN Card, Passport, Aadhaar Card, etc.
    • Address proof such as Driving License, Aadhaar Card, Passport, utility bills, etc.
    • Salary slips for last 3 or 6 months
    What are the documents required for a self-employed person to avail an unsecured loan?

    See the list below to learn about the documents required to be submitted by a self-employed individual in order to get an unsecured loan:

    • Loan application form with required details
    • Proof of business address
    • Proof of continuity of business
    • Cheque for the processing fee amount
    • Passport-size photographs of the candidate
    • Proof of the borrower’s identity such as Passport, Voters ID, Driving License, PAN card, etc.
    • Proof of residence – Aadhaar Card, Driving Licence, utility bill, Voters ID, Passport, etc.
    • Salary slips for the previous 3 or 6 months
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