Published on Feb 26, 2020Updated on Jul 17, 2023
An Unsecured Loan is a loan provided solely based on the creditworthiness of the borrower without pledging any collateral as security in the event of default or non-payment of dues. Unsecured loans are also referred to as personal loans and generally provided to borrowers with high credit ratings. The personal loan interest rates can be fixed or vary based on an underlying base rate.
Consumers apply for personal loans for varied uses. However, any personal loan, irrespective of purpose, falls in any of the two major categories: Revolving Loan and Term Loan. We also have another type, "Consolidated Loan," which is related to the above two distinct loans.
A revolving loan is a loan that contains a credit limit, which is the maximum sum of money a borrower can withdraw at any given time. It is also the maximum aggregate capital a borrower can withdraw over a specified time; the time can be 1 month, 3 months, 6 months, or any specified time. The borrower in the interim can repay the amount partly or wholly and withdraw again, not exceeding the predetermined limit. At the expiry of the specified period, the borrower is obliged to refund the amount plus any interest on the amount withdrawn. A credit card can be considered an example of a revolving loan.
A revolving loan provides the borrower the flexibility and freedom to procure funds as needed to meet working capital needs and cash flow fluctuations. The loan also provides the flexibility of repayment where the borrower is not obliged to pay the loan amount in fixed, rigid installments.
The borrower also has the freedom to extract as much amount as he wants within the prescribed limit and the specified period.
These loans are typically offered at a variable rate of interest.
A term loan is a personal loan where the borrower receives a lump sum amount, and the borrower repays the loan in predetermined fixed installments until the loan is fully paid off at the end of its term.
Consumers usually opt for term loans for long-term investment or purchase of fixed assets.
These loans are generally offered at fixed interest rates.
A loan taken to pay off a pre-existing unsecured loan or credit card loan is a consolidation loan.
Earlier, we had defined the loans based on their composition; unsecured loans are also classified into different types based on their end use.
A wedding in India is usually a grand and costly affair. You can opt for a term loan to fund your entire wedding and make it a memorable one. It may also be the case that you are in a favourable position to bear the cost of the wedding. However, there can be varied, modest expenses from time to time that may require you to loosen your purse strings. In such a case, a revolving loan can be the best choice to handle limited or meagre expenses.
A consumer may opt for a term loan to finance an entire trip. You may opt for a revolving loan to meet recurring or variable expenses of food, shopping, or activities. Many also carry a credit card that can be used worldwide for expenditures at any currency denomination.
Festival loans are personal loans offered at low-interest rates or personal loans with benefits like the waiver of processing fees offered during the festive season. A revolving line of credit like a credit card can be utilized to meet relatively small expenses. However, a personal loan can be procured for the purchase of electronic equipment, organising events, etc.
This loan helps you with the funds to change and upgrade the look of your house to make it more beautiful and endearing. Additionally, by taking Home Improvement Loans to improve your house, you get the benefit of increasing your home’s value in the real estate market.
A top-up loan is a sum of money taken over and above a pre-existing loan. So if you have a personal loan and you require more money, you can apply for an amount over and above the pre-existing loan, which will be consolidated in one single loan. The result is simple and straightforward single EMI repayment instead of facing the problems of paying and recording two or more EMI repayments.
A bridge loan is a loan required for a brief period. The time may extend up to a maximum of 12 months.
Must Read: How To Check Personal Loan Status?
The agriculture sector still employs 50% of the workforce in the country. Hence, there is a massive demand for agrarian loans. A term loan can be procured to purchase land, farm machinery, irrigation channels, etc. However, revolving credit can be obtained to meet working capital requirements and expenses incurred in day to day operations like buying seeds, etc.
A pension loan is offered to individuals who are retired and drawing a pension. It provides you funds in case of sudden and unanticipated financial emergencies that need to be immediately dealt with.
This is a loan that can be procured to purchase white goods or electronics such as laptops, mobile phones, etc. Newly married people often take these loans to get the necessary items like TV, washing machine, refrigerator, etc. for their homes.
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