We all try our best to plan our finances and stick to a budget every month, but every now and then – we are faced with a financial crunch that compels us to look around for loan options.
In India, there are primarily two kinds of loans – secured loans and unsecured loans. Secured loans are a type of loan provided in return for an asset. The asset is held by the bank as a security against the non-repayment of the loan. On the other hand, unsecured loans are provided without collateral. Unsecured term loans are usually sanctioned based on the creditworthiness of the borrower.
Types of Unsecured Loans in India
In the past few decades, India’s demand for unsecured loans has risen. Personal loans or unsecured term loans are often helpful for individuals who need some support to tide over a temporary financial crisis. Such loans are also beneficial for small businesses and shop owners. Here is a look at the different types of unsecured loans in India –
- Private Loan – A private loan, also known as a personal loan, is a popular type of unsecured loan in the Indian market. As it is an unsecured loan, the interest rates on private loans may be higher. Loan applicants who fulfil the eligibility criteria are sanctioned funds within a few hours through hassle-free processes.
- Revolving Loan – A revolving loan is flexible with a predefined credit limit. The borrower may withdraw as much or as little as they need from the credit limit at any time during the specified time limit. The time limit varies from 1 month to 6 months. The borrower is free to withdraw, repay and then withdraw again. Credit cards are an example of revolving credit.
- Term Loans – Term loans are the opposite of a revolving loan. They have a fixed interest rate and tenure. Usually, loan applicants who need a specific amount to fund a big purchase or a long-term investment opt for term loans.
- Business Loan – Established businesses needing finances can avail of a business loan. Unsecured business loans are available to all those businesses looking for funds quickly
Types of Unsecured Loans Based on Purpose
Some unsecured loans are designed for specific purposes, and the funds may be used exclusively for prescribed utilization. Here is a look at some types of unsecured loans based on utilization –
- Wedding Loans – Apart from personal loans, you could also opt for a wedding loan to finance the celebration of your special day. Of course, every loan applicant must fulfill a set of eligibility requirements.
- Debt Consolidation Fund – Taking up a personal loan to consolidate all existing debts into a single one is known as a debt consolidation fund. You can combine your pending unsecured loans, credit card bills, and other debts into one loan and continue to repay it with one EMI. Usually, a debt consolidation fund also helps reduce the interest burden.
- Vacation Loan – A personal loan to fund a vacation helps meet the hotel, tickets, food, and other expenditure without worries. You can opt for a term loan to finance a trip or take up a revolving loan such as a credit card, international credit card, or travel card.
- Home Renovation Loan – If your home needs repairs or renovation, take up a home renovation loan. A home renovation loan covers several modifications and acquisitions for your home. However, you may not purchase home appliances or furniture using the home renovation loan.
- Top-Up Loan – A top-up loan is a loan taken over and above an existing loan. You apply for an amount over and above the current loan amount, which gets consolidated into one single loan. For example, if you have an existing home loan and need some more funds to complete the purchase or for interior design work, you can take a top-up loan.
Even though unsecured loans cost more than secured loans, they are prevalent among borrowers who need financial support for personal or business expenditures; but don’t have collateral to offer. An unsecured loan may prove to be a life saver in times of emergency, such as medical expense or an urgent home repair.
Author Bio: Shikha Ahuja is part of the content marketing team at KreditBee – India’s fastest personal loan platform where professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Shikha writes to create awareness amongst her readers on topics related to loans, personal finance, and budgeting. Being a part of the FinTech industry keeps her on her toes, but she keeps herself grounded through yoga and meditation, and loves to host game nights during the weekends.
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