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Personal loans can be taken by an individual to finance a car, renovate home, consolidate a debt and finance a vacation or to buy electronic items, etc. There is no restriction as to how the money is being used. Personal loans are of two types, secured and unsecured personal loan. In order to take a secured personal loan, you must provide a collateral as security. Unsecured loan on the other hand does not require any collateral.
Unsecured personal loans are not backed with collateral. The borrower is promising to pay the loan without offering an asset as a collateral. If the lender has to approve an unsecured personal loan, then the borrower must have a good credit score. Secured loans include things like purchases through credit card, education loans and personal loans. Here the lender is taking more risk while approving the loan as they do not have any property or asset to recover in the event the borrower defaults. If your unsecured loan application is rejected, you can still avail a secured loan provided that you have an asset that can be used as a collateral.
The lender approves unsecured loans based on the following criteria:
The monthly payment should not exceed more than 30% of his income. Based on the borrower’s income the lender will set a limit that the borrower can repay comfortably without reducing his monthly income by a lot.
If the borrower is employed, then the lender will check how long a company has employed him. The lender just wants to ensure that the borrower has a steady and provable income.
Lenders will look into the borrower’s credit score and history as soon as they meet the basic criteria. The lender will want to see how the borrower has dealt with debt in the past. The credit history also contains details of the EMIs he is paying and the loans that he has cleared. It will also contain details of the times that the borrower has defaulted on the payments and if he has settled a loan. Only when the borrower’s credit score and history is convincing enough for the lender, the loan is approved.
The advantages of unsecured personal loans are as follows:
The disadvantages are as follows:
Be very careful with unsecured loans. Repay them at the earliest and find alternative methods as much as you possibly can to finance your requirements. Most of the times, you might not really need the loan. If you wish to take a vacation save up for it by spending less on your luxuries. Take an unsecured loan only when you do not have enough equity.