Personal loan and unsecured loan- How does the two work and their usefulness?

An unsecured loan, in simple terms, can be defined as a loan that does not require any mortgage or collateral.

In the case of unsecured loans, the loans are approved based on the creditworthiness and capability or repayment of the borrower rather than depending on the assets of the borrower kept as a mortgage in case of any issues in the repayment of the loan.

Some of the examples of unsecured loans are personal loans, credit cards, and educational loans.

How does an unsecured loan works?

A personal loan is the most prominent example of an unsecured loan, and can also be referred to as a signature loan. These loans are not dependant on any collateral and are solely linked with the credit score of the applicant.

A credit score signifies the borrower is capable of paying off the debt and provides a low interest rate with a high loan amount.

Since these kinds of loans require a higher than usual credit score, they can often ask for a cosigner for the loan, the cosigner in this case is liable to pay off the debt in case the main borrower fails to do so.

In case a borrower defaults in paying off an unsecured loan, the lender can exert other options like appointing a collection agency to retrieve the money, file a lawsuit or contact the employer of the borrower to get the loan repaid from his salary.

Defaulting in repayment of a loan can adversely affect the credit score of the borrower and hinder any future loan or credit for the person.

Difference between a personal loan and a personal line of credit?

While a personal loan is an approved amount that can be used by the applicant for any reason, a personal line of credit resembles a credit card.

In this case, a limit of credit is approved and that can be used from time to time in full or in part and repaid on the basis of the utilized amount.

While a personal loan is a one-time approval and fund, a personal credit line can be used over and again as long as the credit limit is maintained and the person is paying off the interests.

When to take a personal loan?

A person can opt for a personal loan for a variety of causes, these can range between, paying off medical bills, taking care of moving and shifting expenses, consolidation of debt, home renovation expenses, wedding expenses, expenditures for the funeral, expenditures on travel and vacation and any other unforeseen expenses.

How to get a personal loan?

The process of getting a personal loan is usually similar to getting any other loan.

First, the person is required to find a lender and compare to other lenders to find the best terms and conditions, repayment options,s, and loan amount that will best suit his needs and cater to all his requirements.

Next, the individual needs to apply for the loan, in the case of online loans the entire process is done online, starting from filling up the application form, completing the documentation, the evaluation, approval, and the disbursal of the funds.

The entire process usually takes a few hours to one day in the case of online loans and is done by following the least formalities.

While in the case of loans from traditional options like banks and other financial institutions one may have to visit the lender to complete the application process, the evaluation of the application and the documentation takes longer and the fund is disbursed to the account of the applicant in a few days.

Where to look for personal loans and unsecured loans?

Gone are the days when the options of borrowing money were limited to the conventional ways of banks and credit unions.

Nowadays one can avail of personal loans and unsecured almost instantly via loan apps and sites. These apps and sites connect the loan applicant with the lender where the applicant can look for the best lender and apply for the loan.

While comparing the different lenders before applying for a loan, one should compare the parameters like the rate of interest, the processing fees and other charges, terms of repayment and tenure of the loan, how much of amount they are granting for the loan, and requirements for collaterals and cosigners.

The minimum eligibility for loan?

Through the apps the applicant can also check his minimum eligibility for the loan, these include, checking the credit score, income, and the debt to income ratio.

The debt to income ratio can be defined as the comparison between the income and the portion of it that goes towards repayment of existing debts.

Based on all of these, the eligibility of the applicant to get the approval for the loan is determined.

Advantages of personal loans:

Personal loans have certain benefits over other kinds of debts.

The rate of interest in personal loans is lower than other forms of credit like credit cards and lines of credit debts.

Consolidating debts using a personal loan can improve the credit score of the person.

The tenure and the repayment terms and conditions are fixed, hence one can have a fair idea of how much funds will be needed towards the monthly installment of loans every month.