What is an Unsecured Loan?

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Find out what is an unsecured loan, its advantages and types.

Key Takeaways

• An Unsecured Loan is a type of loan where the lenders do not ask for collateral.
• Credit cards and personal loan are common examples of unsecured loans.
• Unsecured loans come in handy when you need funds instantly.
• A high credit score, stable income, and good credit history can help you secure such loans.
• Untimely repayment of unsecured loans can impact your credit score significantly.

Introduction

Borrowing money has become easier than ever. Today you can apply for various types of loans to fund your various investments and expenses. Loans are primarily categorised into two kinds – secured and unsecured loans. Secured loans are those where the lender asks you to provide collateral. Then there are collateral-free unsecured loans. Find out more about unsecured loans in this article.

What is an Unsecured Loan?

As mentioned above, unsecured Loans are those where the lender does not ask you to provide collateral. These are loans that your lender sanctions based on certain factors such as your age, income, and credit scores. Lenders typically offer unsecured loans when the loan amount is slightly smaller. They do not ask you to mortgage anything to avail of this loan. Instead, they check your previous credit repayment history to determine if you are creditworthy.

Advantages

• Unsecured loans do not require any collateral.
• There is no risk of losing assets.
• Banks sanction loan amounts for eligible borrowers within shorter timeframes.
• Good credit scores result in higher loan amounts and attractive interest rates.

Types of Unsecured Loans and How they Work

There are two types of unsecured loans – collateral-free instalment loans and unsecured revolving lines of credit. A typical example of the former includes unsecured Personal Loans used for vacation, wedding planning, medical and financial emergencies, etc. You can get attractive Personal Loan interest rates on these loans. You may also avail of unsecured Business Loans for business expansion, cash flow management and other purposes. On the other hand, funds borrowed on a credit card is an example of unsecured revolving lines of credit. In this type of unsecured loan, you can keep borrowing money and repaying the credit card bill as per the predetermined credit cycle.

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When should you opt for an Unsecured Loan?

• When you need instant cash but cannot provide collateral.
• When you need funds for specific expenses like planning trips or celebrations, businesses expansion, home renovation etc.
• If you have a steady source of monthly income, that enables you to make timely EMI payments and repay the loan within the stipulated loan tenure.
• If you wish to consolidate your various debts and pay off existing loans.

Conclusion

As is apparent, an unsecured loan is the best kind of loan. It is a fast-track loan that guarantees quick disbursals. You can choose your preferred type of unsecured loan to pay for your various leisurely and urgent expenses. Unlike Home Loans and Car Loans, unsecured loans are versatile in that you do not have to inform the lender about how you intend to use the funds from the loan. Just ensure you meet the eligibility criteria set by the lender before applying for the loan. Get a competitive interest rate and flexible repayment tenures with unsecured loans. Apply for the loan today.

Download the digibank mobile app on your smartphone. Launch the app and click on the "Get Personal Loan" link on the login page.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.