Unsecured Loan

Description

Loans are availed to pay personal expenses and availed by the persons having a concept of spending now pay later. These can be taken to pay off any one-time expenses like medical bills, wedding expenses, home repair/renovation, vacation costs etc. Unsecured loans carried a higher rate of interest as any guarantee does not back these up.

Unsecured personal loans don’t require any collateral to borrow money. These loans are supported only by the borrower’s creditworthiness. Your CIBIL score plays a vital role in this. Borrower credit score should be higher when compared to a secure loan. Sometimes unsecured loans are backed by a consigner. A consigner takes the legal obligation to repay the debt in case the principal borrower defaults.

Unsecured loans can be one time or revolving. A revolving loan is a loan that has a credit limit. The borrower can spend out of the credit limit and repay the same. Lenders will refuel the limit to the extent of repayment. One time loans are also known as signature loans. A common example of unsecured loans is credit cards, student loans.

While the nature of loans has not been changed, the category of persons has taken a shift. Earlier, people with low ratings went for personal loans. With a decrease in interest rates, persons with high credit ratings are also applying for signature loans. Some users avail of signature loans to consolidate their debt.

Following are the points to be kept in mind before availing home loan

1. Research on loan options: compare various loan options available to you for financial impact like processing fees/upfront fees, rate of interest(floating/fixed), prepayment penalty, tenure etc.
2. Calculate effective interest rates like consider processing fees/upfront fees and Ist instalment due date etc.
3. Decide about fixed and floating interest rates: the fixed interest rate is not during the loan tenure and is usually higher than floating interest rates. Fixed-rate loans also have a reset clause, which means rates are subject to revision. Banks usually invokes this at a specific time interval or a sharp increase in interest rates. Lenders can change floating interest rates during the term or loan – both upside and downside. A floating rate is preferable unless the economy indicates a sharp increase in price soon.
4. Longer tenure means a high cost of a loan at every increase in interest rate. In the initial years, the Interest component is high in the instalment, and you have to pay higher interest on the remaining principal.
5. Check your CIBIL score: Maintain your CIBIL score. A score higher than 750 will help to get better interest rates.
6. Read documents carefully before signing the loan agreement.