Unsecured loans are loans that you can borrow without providing security or collateral. Generally, when you borrow from a lender, you have to pledge any asset or security to the lender. Consider this as a safety net for the borrower. If you fail to repay the loan on time, the borrower takes ownership of the pledged asset – like a car or home – to recover the costs of the loan.
On the other hand, in an unsecured loan, the lender uses your credit history and income levels to evaluate your creditworthiness. You don’t have to give up ownership of any physical property when you take an unsecured loan.
Here, in this guide, we answer some of the most common questions on unsecured loans. Let’s get started.
Unsecured Loans - FAQs
1.What is an unsecured loan?
An unsecured loan is a loan that you take without submitting collateral or pledging an asset. It's also known as a signature loan since your signature on the loan agreement is all that the borrower requires. You promise to repay the loan to the lender, but you don't give the lender the rights to take ownership of your assets if you fail to repay the loan.
2.What are the types of unsecured loans?
Unsecured loans come in several types like:
Personal Loans – These are the most common type of unsecured loans. Personal loans are offered by banks, NBFCs and other digital lenders. There are no restrictions on the usage of the amount. You can use it to meet all your planned and unplanned expenses.
Unsecured Credit Cards – Credit cards are not the first thing that comes to our minds when we speak of loans. However, when you spend using your credit card, you are essentially taking an unsecured loan from your bank. You spend the amount first and later repay it to your lender.
Education Loans – While some education loans are secured (it requires a guarantor), there are certain types of education loans that are offered to students without any collateral or security.
Business Loans – Just like education loans, business loans can be secured or unsecured depending on the type of loan and the lender. Unsecured business loans do not require any collateral, and the lender offers the loan based on factors like – business turnover, business experience and more.
4.How to get approval for unsecured loans?
As mentioned above, to avail an unsecured loan, you do not have to pledge a collateral. Instead, the lender evaluates the loan application based on your creditworthiness, i.e. your financial ability to repay the borrowed amount. For this, the lender considers the following factors:
Your Credit Score and Credit History
Lenders check your credit score to determine whether it's safe to lend the loan to you. They also check your credit history to see if you have successfully paid off your previous loans if any. Hence, it's highly recommended that you take the necessary steps to build your credit score before you apply for an unsecured loan.
Your Employment Status and Income Levels
As unsecured loans do not require collateral, lenders have to look at other factors to determine your ability to repay the loan. They consider your income levels to decide whether or not you can repay the loan.
Irrespective of whether you are applying for a secured or an unsecured loan, lenders ask for your income proof. This includes submitting your latest salary slips, tax returns and latest bank statements. The lender uses these documents to determine whether you draw sufficient income to pay off the loan.
Your Debt-to-Income Ratio
Besides your credit history and income levels, the lender evaluates another factor known as DTI (debt-to-income ratio). The DTI show how much of your income goes to debt repayments in a month. The DTI ratio shows whether the new loan you’re taking will be a burden on your monthly budget, or if you can pay it off without any financial strains. The lower the DTI ratio, the higher are the chances of your unsecured loan getting approved.
5.How much interest will I pay for unsecured loans?
Generally speaking, the rate of interest charged for unsecured loans are higher compared to secured loans. As a result, unsecured loans may pose a bigger financial burden. This is why financial advisors recommend that you opt for secured loans whenever possible. The average interest rate charged for unsecured personal loans in India starts from 10% p.a.
6.How will unsecured loans impact my credit history?
Just like all other debts, an unsecured loan impacts your credit history. However, by repaying the loan on time and regularly, you can improve your credit score. Hence, taking an unsecured loan is an excellent choice for individuals who are looking to build their credit history or improve it.
7.What is the eligibility for getting an unsecured loan?
The actual eligibility criteria depend on the type of unsecured loan and the lender. However, the general rules are:
The borrower’s age must be between 21 years and 60 years. Some banks even offer unsecured personal loans for pensioners beyond the age of 60.
The applicant must be employed in the current job for more than one year and hold work experience of at least two years.
The applicant must draw a monthly salary of at least Rs. 17,500. Note that the salary limit is Rs. 20,000 for metros.
The applicant must have a good credit score and credit history.
Keep in mind that the eligibility requirements vary from one lender to another. Hence, it’s always good to check with the lender before applying for the loan.
8.What are the documents required for unsecured loans?
Since unsecured loans do not require collateral, the documentation process is quite minimal and hassle-free. While the actual list of documents varies from lender to lender, here are the general documentation required:
Identity proof – it can be any of the following standard KYC documents like passport, voter ID, driving license, PAN card, Aadhaar card, etc.
Address proof – it can be any of the following documents passport, Aadhaar card, EB bill, landline telephone bill, water bill, etc.
Salaried employees have to provide the latest salary slip, employment certificate, Form 16, six-month bank account statement, etc.
Self-employed individuals have to provide the profit and loss statements of the business, IT returns, bank statements, proof of business ownership, etc.
Some lenders do not require existing customers to re-submit these documents, as they offer pre-approved unsecured personal loans.
9.What is the amount I can get using unsecured loans?
Unsecured loans are available in a wide range of categories to suit the requirements of different borrowers. Generally, you can borrow as low as Rs. 50,000 or up to Rs. 50 lakhs. The amount sanctioned depends on several factors like credit history, credit score, debt-to-income ratio, income levels and age.
10.What are the advantages of unsecured loans?
Unsecured loans are less risky compared to secured loans. In unsecured loans, you don’t have to provide a collateral. Hence, you are not in danger of losing your assets, even if you can’t repay the loan.
Unsecured loans are easy to avail. They require minimal documentation and are hassle-free. Since there is no collateral involved, the lender doesn't have to spend time assessing the property or other asset submitted as collateral. Hence, unsecured loans are instant, quick and highly convenient.
Unsecured loans have relaxed eligibility requirements compared to secured loans. This makes it easy for borrowers of all categories to get a loan successfully.
11.What are the disadvantages of unsecured loans?
The only disadvantage of an unsecured loan is that it's costly. Since the borrower doesn't pledge collateral, it's considered as more of a risk to the lender. Hence, the lender charges higher interest rates, which pose a financial burden to the borrower.
Meet your Cash Requirements with an Unsecured Loan
Now, that you're aware of the working of unsecured loans, you can confidently apply for an unsecured loan to meet your emergency cash needs. Always make sure to compare interest rates and features offered by lenders to pick the best-unsecured loan at the most affordable rates.