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    Unsecured Loans

    Loan is a financial instrument that involves giving of money from one party to another party in exchange for future payment of loaned money along with interest amount. 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 turn-around time and convenient nature.

    Unsecured Loan

    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 as well as public sector banks offer unsecured loans to their customers. Fierce competition in the financial sector has led to banks easing 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 cannot sell your house to recover the loan amount which a customer defaults on.

    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 business needs like expansion, set-up etc.

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

    Eligibility Criteria for unsecured loans

    Following is 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, in case of employed and between 25-65 years for self-employed individuals
    • Current financial statements play a crucial role in determining loan eligibility
    • Credit history of customer 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 have higher income eligibility criteria and lower loan amounts as compared to any other secured loan. 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 start at an interest rate of around 17% per annum and go higher to up to 22-24% depending upon the annual income of the applicant. 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 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 lending bank frequently. These loans are also available through online application and are very easy to avail.

    • Quick turn-around 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 urgent financial needs.

    • Usually, higher rates of interest

      Since unsecured loans are offered by banks without asking for any collaterals, these loans are offered at a higher rate of interest than other regular loans. The interest rate on these loans is also dependent upon the monthly or annual income of the loan applicant.

    • Nil collaterals

      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 an unsecured loan. Due to this unique feature, unsecured loans are becoming increasingly popular among customers.

    • Higher the income, higher the loan amount

      The more the income of the applicant, the higher is the loan amount that banks offer as unsecured loan. This means that a customer can avail unsecured loans in proportion to the monthly or yearly income that he/she earns.

    • Minimum documentation

      Unsecured loans require minimum documentation and thus have a hassle-free loan application process.

    Difference between secured and unsecured loans

    • A Secured Loan is one that is tied to a collateral that is submitted with the bank as loan security. Conversely, an unsecured loan is one in which no collaterals are deposited with the bank. This ensures that the customers’ assets are not subject to bank’s discretion in case of loan repayment default.
    • Zero collateral submission in turn leads to higher risk of default being associated with unsecured loans. Raised risk of default leads to higher rates of interest for unsecured loans as compared to secured loans.
    • When the end use of loan amount is clearly available as a type of loan, secured loans are sought. For example, loans for buying a car or a house. On the other hand, when the end use the loan amount needs to be put is not available as a discreet loan option, then an unsecured loan is sought by customers. For example, if you want cash for renovation of house or for a wedding in the family.
    • Loan tenures for secured loans are generally greater than those for unsecured loans. Most banks usually offer maximum loan tenure of 5 years for unsecured loans whereas secured loans can have a maximum loan period of up to 30 years.

    Banks offering unsecured loans in India

    Most Indian banks, private as well as public banks 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, Standard Chartered Bank etc. All these banks have similar eligibility criteria and offer interest rates that are dependent upon the monthly income of customers.


    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.

    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 loan.

    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 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.

    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.

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