An unsecured loan is a loan that is sanctioned to the borrower without pledging collateral like property, vehicle, or other tangible assets. As opposed to a secured loan, these types of loans are more popular and can be used for multiple purposes, up to the borrower’s discretion. Unsecured funding is riskier for the lender than the borrower, which is why you need to have a considerably high credit score to become eligible for such a loan.

If you are looking for easy financing options and want to go for an unsecured loan, here are the pros and cons you should be aware of.

Pros of unsecured personal loans

1. No risk of losing collateral

Perhaps the greatest advantage of a personal loan is that it poses no risk to the borrower of losing collateral such as their house, car, gold, etc. This is especially lucrative for those who do not have significantly valuable possessions to offer as collateral. So even if you default due to unforeseen reasons, you will not have to worry about losing your house.

2. Easy application process

Once you become eligible for this loan, the application and approval take very little time as compared to a mortgage. The loan amount is also disbursed within a few days. You can also choose online lenders to get unsecured funding and get it approved in a short period.

3. Multi-purpose loans

Secured loans such as mortgages, student loans, automobile loans are fixed and used only for a single purpose, whereas unsecured debt can be used to finance a multitude of expenses.

Additional Read: How Personal Loans Helps in Your Business?

Cons of unsecured personal loans

1. Tough eligibility criteria

Since these loans do not ask for collateral, the risk to the lender is high. To compensate for that risk, the eligibility criteria are tough and demand an excellent credit score and no outstanding debts from the borrower.

2. Smaller loan amount

In the absence of collateral, financial institutions go to great lengths to ensure that the loaned amount is repaid and often sanction smaller amounts than secured loans. Further, personal loan interest rates tend to be high and the borrower has the risk of falling into a debt trap. Adding to this the repayment tenure which is also shorter, it might get difficult for you to repay the loan with high interest rates in a short amount of time.

3. Defaulters can be prosecuted

If you default or fail to make payments on time, the lenders can prosecute you in court, thus adding the expenses of attorney fees and other expenses to your already outstanding debts. Therefore, you should carefully consider all these points before going for an unsecured option.

Advantages and Disadvantages of an Unsecured Loan

Additional Read: 5 Reasons Why Personal Loans are Hassle-Free at Tata Capital

Conclusion

It is clear that unsecured loans have their fair share of advantages and disadvantages. Have more questions or require assistance with a loan application? Tata Capital provides some of the best interest rates and with the help of our personal loan EMI calculator, you can see for yourself which type of loan will be most advantageous. Contact us today to learn more!

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