A loan that deals without keeping any asset as collateral is said as Unsecured .i.e., without any mortgage. Personal loans and business loans comes under this category.
- As the borrower does not provide any asset as security, banks tend to charge high interest rates on the borrowed amount.
- The interest charged can be in the range of 14% to 48% per annum based on type of loan.
- Unsecured loans are issued and supported only by the borrower’s credit worthiness rather than keeping some asset under collateral. Borrower’s high credit score will help him to issue loan simply.
- However unsecured loan are issued on the track record of the person which includes :
Salaried: Salary, revenues from other sources and CIBIL etc.,
Business: Turnover of the business for annum, Gross & Net profits, ITR’s and CIBIL etc.,
- In case of any default on the loan, the lender can’t go for cease of asset and cannot recover their money that much easily.
- Instead some security measures are taken to recover issued loan by looking at guaranteed person, lender can drag to court and damage borrowers credit worthiness , and a specially appointed person to recover such bad debts etc.,
- Examples of unsecured loans are : credit cards, personal loans, education loans etc
Pros and Cons of Unsecured loans:
- There won’t be chance of losing any asset in case of default
- All we need is a just documentation and signature to avail the loan
- Good track records will help us in availing loan very fast.
- As in the case of secured loans, these loans also will have number of options to choose the repayment mode.
- As mortgage is involved in the process, the lenders charge higher interest rates even for a short-term
- Loan amount will be limited to client eligibility as there is a financial risk
- One may trap into the debt cycle due to continuous failure in payment of loan amounts
- Borrower is dragged to court after some excuses in case of failure in payment of loan
Which one is better (secured/unsecured)?
Exactly we can’t say which one is better because borrower applies for loan with different aspects like may look for lesser interest, lesser time period, collateral free but all together will not come in process of loan.
- Borrower should compromise in some aspects and have to opt for his better option.
- Both are good options if they fit into borrower’s requirement perfectly.
- In general secured loans are good for creditors for the reason collateral is involved to be risk free at creditors point
- Unsecured loans are good for borrowers where collateral is not involved and will not lose any asset.
Once borrower is clear about the type of loan required, he/she has to approach different lenders to see what interest rates they offer. Before finalizing your lender don’t forget to compare the rates of interests being offered by different banks. Try to browse through some websites to check their types of repayments options and past history in lending and collecting loans.