Unsecured Loans: Understanding Its Types and Benefits

There are two different types of loans. The first one is the secured loan, which is the most dominant type because most creditors and lenders offer secured loans. From the name, you can easily understand that you have to give something as collateral or a guarantee. If you cannot repay the debt, the creditor will have sole discretion to liquidate the asset. Therefore, they can get the repayment back.

The second one is an unsecured loan that doesn’t ask for any collateral. It doesn’t matter what your credit score is or the documents you submit. The approval chances of an unsecured loan depend on your income, credit history, CIBIL score, consistent income flow, IT returns, and so on. The better these documents are, the better the chances are of getting the unsecured loan approved. However, before applying for such a credit type, it is better to know everything about unsecured loans.

What are the different types of unsecured loans?

There are different types of unsecured loans. One has to understand the classifications of this credit type to decide which one to go for. Keeping this in mind, we have shared some details about the common unsecured loan types prevalent in the finance market.

1. A revolving loan contains a specific credit limit that defines the maximum amount one can withdraw at a time. Usually, the credit repayment duration varies between a month and six months. But you can negotiate with the creditor to customise the plan. You can even change the repayment duration according to your convenience.
2. A term loan is a kind of unsecured personal loan without any security. Here, you get a lump sum of capital, and you need to repay the amount with the principal in the form of fixed instalments. Payments must be made every month until the term ends.
3. A consolidation loan helps repay the debt or any other unsecured loan you previously took.
4. A wedding loan helps manage the budget for a wedding. It is almost like a personal loan, but here, the purpose gets specified as a wedding.
5. An educational loan is one of the best examples of unsecured loans. A student can take credit from a bank or any other public creditor to complete his or her education. Once the student gets a job, he can repay the loan quickly. Usually, engineers can claim an education loan.

What are the benefits of choosing an unsecured loan?

A secured loan is quite feasible, as you can claim a higher principal amount with a lower interest rate without worrying about your credit score or the documentation. However, if you miss or delay the payment, the bank or the creditor will send notifications about using the collateral.

Therefore, getting an unsecured loan sound much better than a secured loan. However, before you make any decision, understanding the full scope of benefits will help you. This way, you can ensure your choice is correct for the present and future. Keeping this in mind, we have listed some of the significant benefits of getting an unsecured loan.

7 benefits of an unsecured loan for a borrower

1. The first and foremost benefit of an unsecured loan is that you won’t have to give anything as collateral. So, even if you don’t make your monthly payments on time, the creditor can’t take away your most valuable item.
2. A good credit score is fundamental to getting unsecured loans. But you don’t have to wait until you can provide proof of having an item that matches the valuation of the loan. This is because no creditor will give you a secured loan without an asset valuation almost equivalent to the credit.
3. If you do not have a good credit score, you can quickly partner up with any professional who will help you understand the ways to improve the number. Besides, managing all the debts on time and limiting credit expenses will also help a lot. These things will automatically raise your credit score and give you the best chance of getting a personal loan.
4. You can change the attributes of an unsecured loan. For instance, the company you work for goes bankrupt without you, as an employee, having any knowledge of it. If you relay the information to the creditor, you may not have to give a high-interest rate for long.
5. Also, the unsecured loan will help with tax exemption according to Section 80C of the Indian Penal Code. Once you submit all the documents during taxation, you can get a maximum exemption and save a lot of money.
6. The documentation process associated with unsecured loans is relatively hassle-free. This is because most creditors want to see the income proof and the credit report. You don’t have to provide a legal valuation for any asset or complete details about the asset, such as the purchase bill or the title change certificate.
7. Anyone can apply for an unsecured loan without following the rules and regulations put in place for secured loans. When you turn 18, you can opt for a personal loan, provided your guardian can repay the loan.

Conclusion

In this article, we have explained the five most commonly chosen types of unsecured loans and their benefits. Based on this, you can decide if you want a credit type that requires no collateral, a high credit score, and income proof. If not, get secured credit, and for that, be ready to risk your asset. Before making any decision, you can consult an expert and understand the differences between secured and unsecured loans in detail. After all, you have to repay the credit. If not, either the credit charges a higher interest rate or forfeits the collateral. So, consult the experts at Piramal Finance and know the full benefits and scope of unsecured loans, as well as the risks.