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The Pros and Cons of Unsecured Loans - Know Everything Here!

Published on Jan 21, 2021Updated on Jan 24, 2024

The Pros and Cons of Unsecured Loans - Know Everything Here!

Whenever you need funds for some purpose, you are likely to take a loan. Thus you don’t need to redeem your investments or savings. The process of taking a loan has become convenient over the last few years. There are multiple types of loans being offered by lenders for a variety of purposes.

If we focus on personal loans itself, there are different types of personal loans being offered by lenders. Some of the most popular types of personal loans are listed below:

Due to the enhanced popularity of personal loans among individuals, you can even get an instant personal loan by filling out an online application form with all the necessary details. Once you fill out all the details and enter the principal loan amount, interest rates, and the tenure of the loan, you would be contacted by an executive from the bank, and they would disburse the loan within 24 hours.

Personal loan is a form of unsecured loan. Does it make sense to avail an unsecured loan? Let us check out the pros and cons

What is an Unsecured Loan?

Whenever you opt for a loan, you need to keep something as collateral. But, if you opt for taking an unsecured loan, you don’t need to pledge collateral. You won’t need to pledge any property, vehicle, or other assets as collateral to get an unsecured loan. This is a pretty risky loan for the lender as he does not possess any leverage over the borrower. This is the reason why a borrower needs to have a pretty high credit score for being eligible for getting an unsecured loan.

There are three types of unsecured loans being offered by the banks or other financial institutions. 

  1. Revolving Loan
    A revolving loan comes with a credit limit that has a maximum amount of money a borrower is allowed to withdraw at any particular time. The borrower has the flexibility to withdraw as many funds required in the specified period and the prescribed limit. The borrower is not bound with rigid installments in this type of loan.
  2. Term Loan
    A term loan is the type of loan where the lender would provide the borrower with a lump sum amount, and the borrower has to repay that amount in rigid installments before the end of the term. 
  3. Consolidation Loan
    A consolidation loan is a pretty simple one that is taken by the borrowers to pay off their pre-existing credit card loans or any other unsecured loan.
Must Read: Secured Loan Vs. Unsecured Loan: What is the Difference?

Pros of Unsecured Loans

  • Easy process and Quick Disbursals
    If you are eligible for this type of loan, the process of application and approval is pretty simple and takes very less time as compared to the secured loans. The loan amount gets disbursed within a few days. You can even go with any online lender and get an unsecured loan within a very short period.
  • No risk for losing collateral
    The most significant advantage of taking up an unsecured personal loan is that there would be no risk on the borrower for losing any property, vehicle, or other assets that have been kept for collateral. This is considered to be the most lucrative option for every individual who doesn’t have valuable possessions to offer as collateral. So, even if there are worst situations, you won’t have the risk of losing your house or any other property.
  • Multi-purpose loans
    Secured loans are usually fixed, and most of them can only be utilized for a fixed purpose like automobile loans for getting a new vehicle, Home loans for purchasing a house, and many more. On the other hand, different types of unsecured loans offer flexibility to use the funds for various purposes. You won’t be bound to use them for any particular purpose.
Must Read: How Many Types of Unsecured Loans Are Available in India

Cons of Unsecured Loans

  • Eligibility criteria can be demanding
    These loans are pretty risky for the lenders as they don’t ask anything as collateral from the borrowers. In order to compensate with the amount of risk, the lenders keep the eligibility criteria very tough where the borrower needs to have an excellent credit score and no other debts.
  • Loan amount is smaller
    As there is no collateral, the financial institutions make sure that the loan amount is repaid, and this is the reason why they offer smaller loan amounts as compared to secured loans.
  • Higher Interest Rates
    Since these loans are unsecured, the interest rates are on the higher side as compared to a secured loan.
  • Shorter Tenure
    Unsecured loans can have a maximum term of not more than 5 years. This means that if your loan amount is on the higher side, the monthly EMI will be more even if you choose the maximum possible tenure.

There are plenty of things to look at before taking an unsecured loan. From the above list of pros and cons, you would be able to decide whether it is a good option for you to take up an unsecured loan or not.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

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