There are several types of unsecured loans available in the market which a person can opt for when in dire requirement of money. However before availing any of the unsecured loans one needs to understand the intricacies involved and the pitfalls that must be guarded against in such loans.
What are Unsecured Loans?
Essentially the unsecured loans are those types of loans where the borrower does not have to provide any kind of security or collateral against the money being taken from the bank. The secured loans require some kind of security which acts as a guarantee against defaults in loan repayment.
Types of Unsecured Loans
There are 3 basic types of unsecured loans prevalent in India currently.
Personal Loans: These are loans given to individuals for short durations without any specific purpose attached thereof with reasonably high rate of interest. The income and repayment capacity of the individual are the only criteria for providing such loans.
Credit Card: This arrangement refers to the ability of people to buy goods or services using plastic money which they have to recoup within a specified period of time after which they shall be charged a certain interest on the dues.
Loans against Credit Cards: Credit card holders are offered loans against their cards in terms of cash advances at a prohibitively high rate of interest.
Typical Interest Rates of Unsecured Loans
| Type of Loan | Rate of Interest | Use of Funds |
| Personal Loan | 12% – 24% | Unrestricted |
| Credit cards | 18-40% | Flexible |
Reasons for availing Unsecured Loans
These are some of the situations in which one should opt for unsecured loans:
- When you are sure about being able to repay within a short span of time without incurring too much interest.
- Unforeseen urgent requirement of funds which cannot be met from any other sources. These circumstances may include emergency conditions like medical expenses etc.
- Short term funding acquiring assets or secured investments when you are sure to get your capital back in time to repay the unsecured loan.
Risks Associated with Unsecured Loans
Apart from the inherent risks that the financier faces while disbursing unsecured loans there are some risks for the borrower which he must appreciate:
- Extremely high rates of interest involved in the unsecured loans imply that a huge amount will have to be repaid back by the time the loan tenure ends.
- Since the unsecured loans are for shorter tenures the EMI shall be high and there will be high penalties involved in case of defaults the chances of the borrower landing up in debt trap is also high.
- In case the borrower is unable to keep up the payments and defaults in between his credit ratings will also be adversely affected that shall affect his chances of securing loans in the future too.
As far as possible one should stay away from such unsecured loans with high interest rates unless the requirement is pressing with no other option. One has to keep the penalty factors in mind and carefully calculate the repayment possibilities while taking such a loan. Before taking the loan and whenever unable to make timely payment the only golden mantra that the borrower should stick to is – “Negotiate and Negotiate”.