For good reasons, the trend of unsecured loans is on the rise. In this blog post, we will unravel why unsecured loans are increasingly becoming a popular business funding option in the market by delving deeper into its definition, types and benefits below. Let’s begin exploring!
Defining Unsecured Loans
Sometimes referred to as signature loans or good faith loans, unsecured loans are those that don’t require any security deposit or collateral. Rather than pledging assets, lenders approve and issue unsecured loans based on creditworthiness and your ability to repay the loan. That said, you will have to provide information regarding your credit history, employment status, income and savings.
Likewise, since no collateral is required for unsecured loans, these loans are generally considered riskier for the lenders. That’s why, when you go for unsecured loans, you’ll need a relatively high credit score to qualify and attain attractive loan terms.
What’s the Difference: Unsecured Loan vs. Secured Loans
Simple. The main difference between unsecured and secured loans is the need for collateral. With a secured loan, before you can secure the terms of the loan, you are obliged to provide collateral or a piece of your property that has monetary value and can act as security to mitigate the lenders’ losses if you fail to repay a loan or are unable to keep up with the payments. The two common examples are car loans and home loans.
On the other hand, as discussed in the definition above, with an unsecured loan—lenders don’t rely on collateral when setting the loan terms. Instead, they based it on your income and credit history. And with that, you typically have to accept higher interest rates to limit the lenders’ risk.
Types of Unsecured Loans
Now that you know about unsecured loans let’s discuss and delve into the various types.
Three Main Types of Unsecured Loans
Generally, unsecured loans can be classified into three types:
1) Revolving Loan
Refers to a loan that comes with a credit limit where the borrower has the flexibility to withdraw as many funds at the prescribed limit and in a specific period. In this type of unsecured loan, the borrower is not bound by rigid instalments. Examples include personal lines of credit and credit cards.
2) Term Loan
In a term loan, the lender will provide the borrower with a lump sum amount, and before the end of the term, the borrower must pay that amount in rigid instalments.
3) Consolidation Loan
Taken by the borrowers to repay their pre-existing signature loan, credit card debt or any other unsecured loans.
Other Types of Unsecured Loans
A) Personal Loan
This is the most common type of unsecured loan wherein when you apply for this loan, you don’t need to bring up the reason for taking the loan. Furthermore, a personal loan is also an instalment loan that you must repay in equated monthly instalments (EMIs) over a fixed term.
B) Personal Credit Line
Refers to the type of revolving debt that usually has a variable interest rate attached.
C) Unsecured Credit Cards
With unsecured credit cards, you’ll have access to a line of credit that can be utilised for any reason or grounds with the swipe of your card.
D) Signature Loan
As the name implies, you only need to provide your signature to obtain this loan, which is why this is the simplest type of unsecured loan. As a borrower, your signature will function as the solitary or exclusive security for this loan in which you will guarantee your lender to pay off the entire loan without fail on the agreed due date. You can obtain a signature loan from a bank or a nonbank financial company.
E) Peer-to-Peer Loan
This type of unsecured loan is an easier form of acquiring loans and can come in different structures and options. So whether you seek out the help of friends and family or utilise an online platform to search for a person willing to lend you money, you will have the choice of finding an unsecured loan. Peer-to-peer loan mostly follows a fixed-rate interest system wherein its rate of interest is competitive in nature and the eligibility requirements are less stringent.
F) Education Loan
Also called a student loan, this type of unsecured loan has the specified purpose of funding student expenses such as course fees, library fees, mess fees, hostel fees and other fees related to one’s education course. Students who apply for this loan can enjoy a moratorium period where they don’t have to pay anything. Aside from that, they can also enjoy flexible repayment modes and subsidies on interest rates.
G) Instant Loan
Instant loans are small loans typically rendered to salaried professionals and self-employed professionals in some companies. Here, the loan can be paid back whenever the borrower gets their next wages or salary. Likewise, instant loans are strikingly higher than traditional loans.
Why Unsecured Loan is the New Trend
To further understand why more and more businesses or SME company owners are turning to unsecured loans as the new trend and a popular financing option for many, let’s look at its salient benefits.
Easy and Convenient Loan Application
If you opt for unsecured loans, the application and approval process is extremely easy and pretty simple, as it takes much less time than secured loans. Within a few days, the loan gets disbursed. Likewise, you don’t need to visit the leading bank branch to get these loans since you can obtain unsecured loans by applying online with any online lender.
Less Stringent Qualifying Criteria
Compared to other types of loans, the qualifying criteria for unsecured loans are less stringent. As long as you can prove that you have a stable stream of income and an excellent credit history, obtaining unsecured loans wouldn’t be a hassle. For that, you will be asked to provide supporting documents like your unique identification (UID) and permanent account number (PAN) to prove your eligibility. Thus, some lenders approve unsecured loans just by considering the profitability of a business and not the credit score. So whether your credit profile is average, but you have a lucrative business, you can still stand a chance from digital lenders.
Higher the Income, the Larger the Loan Amount
If you apply for secured business loans, you will only get an amount in proportion to the collateral value. Conversely, you can apply for a larger loan with unsecured business loans since no asset limits the loan size and acts as collateral. That being said, the higher your income, the larger your loan amount.
Minimum Documentation: Less Paperwork
Since no asset is involved, the documentation process for unsecured loans is minimal and requires less paperwork. Most lenders now allow applicants to submit their documents online. Let’s say, for instance, you may email scanned copies of your last six months’ financial statements to get an unsecured line of credit for your business.
Flexible Repayment Options
Financial institutions usually oblige you to repay the loan in fixed instalments in a given time frame. However, a stringent repayment time frame for some SMEs proves to be a challenge. In such events, an unsecured loan could be an ideal solution because most lenders of unsecured loans offer flexible repayment choices.
No Risk of Losing Collateral
The most crucial advantage of getting unsecured loans is that there would be no risk on the borrower for losing any property or other valuable possessions that have been kept for collateral. This means your assets are secure with you even if you fail to repay this type of loan. Due to this, unsecured loans are increasingly becoming a popular funding option among customers and clients.
Wrapping Up
Indeed! The tide is changing in the finance world, and it is clear that unsecured loan is the new trend due to the great deal of flexibility and convenience it provides for most borrowers. However, before you take the plunge to apply, you must thoroughly understand this particular business loan and ensure you can negotiate for the best-unsecured loan at an attractive interest rate! Good luck, and thanks for reading!
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