Unsecured loan is a type of loan that is offered to borrower without keeping any of his assets by the financier as security against the loan.
Secured & Unsecured Loan
Broadly, there are two types of finance schemes offered by the finance companies to borrowers. Secured loans and unsecured loans. When finance companies require the borrowers to deposit with the financiers any of their valuable assets before the loans are offered, it is called secured loan. In this case, the asset offered to the financiers as collateral works as security against the loan taken by the borrowers. In this case, since the financiers keep asset of borrowers as security against the loan, borrowers can’t default in making payments and therefore, the financiers have less risk of loosing their money. In case, even after offering any asset as collateral, borrowers fail to make payments, the financiers have all the legal rights to sale the collateral to recover their money. Due to such low level of risk, the financiers always prefer secured loans.
Contrary to the above, there is another type of loan called unsecured loan. In case of unsecured loans, borrowers are not required to deposit any asset with the financiers when they need loans from the finance companies. Since, unsecured loan does not require the borrowers to offer to the financiers any asset as collateral, there is always a risk for financiers in recovering their payments. Due to such enhanced risk, financiers do not prefer unsecured loans as much as they prefer the secured loans.
Secured & Unsecured Loans: Difference
You must be thinking that how financiers’ preference affect the borrowers. You may also say that borrowers are interested in getting loans not in the choices of financiers. However, it is this preference or choices of financiers’ that make the major difference. In case of secured loans, financiers keep an asset of borrowers as collateral, which makes the loan less risky for financiers. Since, financiers have low risk associated with the offering, they charge comparatively low rate of interest, which in turn makes the loan cheaper for borrowers.
Whereas, in case of unsecured loans, since financiers do not take any collateral, they have risk in actually recovering their payments from borrowers. Moreover, the borrowers do not keep any valuable asset as collateral, they take payments not seriously, which at time results in defaults or delay in payments. These factors make the loans risky for financiers. To compensate this risk element, financiers charge a higher rate of interest to borrowers compared to secured loan. This higher rate of interest makes the loan costly for borrowers.
Unsecured Loan: Eligibility, Loan Amount & Cost of loan
Anybody who has a steady source of income, a savings bank account, and proof of identity & residence, is eligible to get an unsecured loan. The loan amount is decided on the basis of the borrowers income level, his credit record, number of years in the present organization, transactions shown in bank statements, recommendations etc. Similarly, rate of interest charged by the lender is based on credit record, income level, amount of loan, any track record of successfully closing any loan etc. The concept, the better the profile of borrower, the less rate of interest they pay.
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