Loans have become an inevitable aspect of our life, required for many reasons including personal or professional. Loans are classified into secured and unsecured loans.
- Secured loans are loans for which a borrower has to pledge some security like an asset.
- Unsecured loans, on the other hand, are collateral-free loans.
The biggest disadvantage of unsecured loans, including personal loans, is that they carry a higher rate of interest than secured loans. Unsecured loans are given based solely on the creditworthiness of the borrower.
Explore different unsecured loans which one can avail in India to meet financial emergencies. Considering an unsecured loan? Make sure to check your credit score for free to see if you’re eligible for one. Let’s take a closer look at the different types of unsecured loans in India.
Additional Reading : Secured Loan and Unsecured Loan in India
Unsecured Loans Based on Composition
Unsecured Loans based on composition fall into three major categories, namely,
A revolving loan is a loan with a credit limit, implying the maximum sum of money/maximum aggregate capital which can be withdrawn by a borrower at any given time, i.e., 1 month, 3 months and any such specified time period.
The borrower can repay the amount either partly or fully in between and then withdraw again within the specified limit. After the specified period ends, the borrower has to refund the amount and any interest applicable on the withdrawn amount.
Revolving loan provides flexibility and ease of procuring funds and are offered at a variable rate of interest. For instance, credit cards and overdraft are popular examples of a revolving loan.
Under a term loan, which is a personal loan, the borrower receives a lump sum amount, which needs to be repaid in fixed instalments, as per the loan agreement till the end of the loan tenure. Borrowers prefer such loans for their long-term investment or purchase of fixed assets. Terms loans normally have fixed interest rates.
A consolidation loan is a loan that is undertaken to pay off a pre-existing unsecured loan or credit card loan.
Unsecured Loans Based on Utilization
Unsecured loans are also classified based on utilization as below.
A wedding loan can be considered to fund the entire wedding expenses in the form of a personal loan, which is a term loan. Some lenders also offer revolving loans for meeting various wedding expenses for a specific time period.
You may require funds to finance your vacation. If it is to finance the entire trip, then a term loan would be most suitable. For meeting recurring or variable expenses relating to shopping, food etc, a revolving loan like a credit card would be more feasible.
Additional Reading: Top 5 Personal Loans for Pensioners in India
Festivals are part and parcel of the Indian way of life entailing high expenditure. Festival loans are personal loans that are offered at low interest rates and come with added benefits. Depending on the type of festival expenditure involved one can use their credit card or a term loan.
Home Renovation Loan
A home renovation loan would help you with the requisite funds to renovate and upgrade your house to make it more beautiful and appealing to suit your tastes. Such loans also help in increasing your home’s potential value in the real estate market.
A top-up loan is an additional loan offered over and above a pre-existing loan. Your pre-existing loan and the top-up amount would be consolidated into a single loan with one single EMI repayment mode. Such loans are helpful if you require further funds over your existing loan.
A bridge loan refers to an unsecured loan that is needed for a small period and which could be extended up to a maximum of 12 months.
The agriculture loan is highly popular owing to our agrarian society. A term loan could be used for buying land, farm machinery, etc. while a revolving loan can be utilised for undertaking working capital requirements and meeting day-to-day agricultural expenses.
A pension loan is available for retired individuals who are drawing a pension. Such a loan is beneficial for meeting the urgent financial needs of retired individuals, especially big-ticket medical expenses.
Consumer Durable Loan
Consumer durable loan is available to purchase any type of consumer durable goods like laptops, mobile phones, washing machine, TV etc.
Additional Reading: More About Personal Loans
Unsecured loans are of different types as seen above which can be availed by a borrower without pledging any kind of security. However, a borrower has to prove his creditworthiness to get an unsecured loan approved. So, it pays to track and monitor your credit score and report regularly, to ensure that you’re eligible for unsecured loans.
1. What is a good credit score?
A credit score that falls in the range between 750 – 900 is considered good with 900 being the maximum score. Having a good credit score ensures the borrower of getting better loan terms including higher loan amount, better interest rates, lower EMIs, longer tenure etc.
2. What is an unsecured loan?
An Unsecured Loan is a loan without any kind of collateral. Such a loan is mostly provided based on the creditworthiness of the borrower.
3. Is a personal loan an unsecured loan?
Yes. Personal loans are unsecured loans and are mostly given to borrowers with a high credit rating, as they are collateral-free loans and given solely based on the borrowers’ creditworthiness. Interest on a personal loan can be fixed or variable.
4. Is credit score very important for availing of an unsecured loan?
Having a good credit score is an important criterion for getting your unsecured loan application approved by most lenders in India, though now innovative online loan platforms are available which offer personal loans even with a low credit score. However, there are pre-determined terms and conditions to be fulfilled for securing these loans.
5. Can I use my credit card to repay my personal loan?
Yes, you can use your credit card to repay your personal loan EMIs. Just ensure that you settle the credit card bill on time to avoid further debts.