Often we may need money for personal reasons such a buying a gift,
spending on a holiday, or even for buying a new appliance at home. For
all these purposes, it is not possible to provide collateral as
security for lending money. This is because availing a secured loan is
time consuming and involves a lot of paper work. Borrowers may avail an
unsecured personal loan in order to meet such needs.
An unsecured loan has many names. It is usually known by names such as
unsecured loans, or signature loans. As the name signifies, a personal
loan is one that is provided based on the personal financial capacity
of a person. Essentially, a personal loan is provided to a person based
on the size of the person’s income, debt and credit history.
Unsecured loans do not require customers to furnish collateral or other
common forms of security that other kinds of loans require them to.
In terms of risk, the main difference between a secured loan and an
unsecured personal loan is that since a personal loan is not tied to
collateral, a borrower does not stand to lose the collateral in case he
or she misses a payment. This places additional risk on the lender
because the loan is given on the estimated repayment capacity of the
individual. Hence, before giving such a loan, a lender will usually
conduct a comprehensive assessment of the borrower and ensure that the
borrower is able to pay back the loan. The higher risks are covered by
higher interest that is usually associated with such loans. The lack of
documentation also makes unsecured personal loans hassle free in the
perspective of the borrower. There is less paper work to be done and
the loan can be obtained soon provided the bank is happy with the
consumer’s credentials.
The amount of money that can be borrowed as a personal loan depends on
the credentials of the person who is applying for the loan. Hence, bank
managers may be able to provide higher loans to individuals if they
feel that the risk is worth taking. It follows that borrowers need to
have a clean repayment history if banks are to trust them. Similarly,
banks may also reduce the interest rate that is charged from consumers
if the credit history of consumers is clean.
