[ecis2016.org] Read on to know about the different types of unsecured loans in India.
Unsecured loans: Meaning
Loans provided without pledging collateral as security, in case of default or non-payment of dues, and are based completely on the creditworthiness of the debtor are unsecured loans. Borrowers with high credit ratings are often provided with unsecured loans, which are also known as personal loans.
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What are the types of unsecured loans?
A young population and economic mobility have contributed to an increase in demand for unsecured loans. Unsecured loans are in high demand due to a young population, economic mobility, and the variety of loans available. An unsecured loan can be used for a wide range of activities, ranging from education and marriage to agriculture and business.
They can be classified into three broad types:
Term Loan
Borrowers who take out term loans receive a lump sum of cash upfront in exchange for specific repayment terms. Term loans allow lenders to receive a fixed amount over a predetermined repayment schedule and either a fixed or floating interest rate. A term loan is the simplest type of business loan. In return for the loan amount and interest, you agree to repay the lender over a set period of time. Most loans require monthly payments.
Revolving loans
Financial institutions provide revolving loan facilities that allow borrowers to borrow, repay, and borrow again. As a result of its facilities for repayment and re-borrowing, revolving loans are considered flexible financing tools. Since the borrower can repay the loan or take it out again during an allotted time period, it is not considered a term loan. A term loan, on the other hand, provides a borrower with funds, followed by a fixed payment schedule.
Consolidation Loan
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It refers to a loan obtained to pay off any existing unsecured loan or credit card loan. When you consolidate, all of your bills are rolled into one monthly payment, regardless of whether they are loan payments or credit card bills. It is possible to simplify or lower your payments if you have multiple credit card accounts or loans. Consolidation loans do not eliminate debt.
What are the types of loans based on utility?
Unsecured loans can also be categorised based on end-use.
Bridge Loan
Bridge loans are short-term loans offered until a company or individual obtains permanent financing or pays off an existing obligation. They enable borrowers to meet their current obligations by providing immediate cash flow.
Agricultural Loan
A farmer may apply for an agricultural loan to finance seasonal agricultural operations or related activities such as animal farming, pisciculture, or purchases of land and equipment. A loan of this type can also be used to purchase inputs such as fertiliser, seeds, and insecticides.
Pension Loan
Pensioners can apply for special personal loans from banks. Pensioners also call these loans ‘pension loans’. To qualify for pension loans, you must comply with the pension loan rules, including the pension loan age limit. The loan can be obtained by the government, military, or family pensioners up to 76 years of age.
Wedding Loan
A wedding loan is a loan you take out in order to cover the costs of getting married. As with any personal loan, you will qualify for a wedding loan based on your creditworthiness. ‘Wedding loans’ is usually a marketing term. To entice soon-to-be newlyweds, lenders use terms such as wedding loans, engagement loans, and bridal loans, but you can use any personal loan to pay for a wedding.
Festival Loan
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Festival loans are unsecured and require no collateral. These loans are mostly used to buy gadgets, household items, etc. Every year, more and more people seek credit thanks to the availability of smaller ticket loans.
Vacation Loan
A vacation loan is a personal loan that can be used to pay travel expenses. The rate that you receive depends on your credit score, and you will have to repay the loan in fixed monthly instalments.
Home Renovation Loan
If you would like to renovate or repair your house, you can apply for a home improvement loan. The loan can be used to renovate both interior and exterior areas of a house, for example, painting and whitewashing, tiling and flooring, waterproofing, plumbing, and sanitary work.
Top-Up Loan
You may borrow a certain amount of money over and above your existing mortgage with a top-up loan from a bank, housing finance company, or other financial institution. Top-up loans are better than personal loans because they have a lower interest rate structure and more flexible loan tenure. In contrast, a personal loan may be taken for a maximum of five years, whereas top-up loans may be taken for a maximum of 30 years.
Consumer Durable Loan
Consumer durable loans can be implemented to finance the purchase of household items such as washing machines, refrigerators, air conditioners, LED TVs, microwaves, furniture, clothes and groceries.
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