People borrow money for a variety of reasons. It could be expanding their business, getting a college education, buying a house or a car, getting a ring for their girlfriend or wife.
Loans generally fall into two categories, secured and unsecured. First, let’s understand what a safe loan is.
Secured loans are those for which a borrower holds an asset as collateral or collateral to borrow money. Collateral can be your car, your house, or anything valuable.
It simply means that in the event of a default, the lender can use the asset to repay the funds advanced to the borrower.
Common types of secured loans are mortgages and auto loans, in which the object to be financed is used as security for the financing. With a car loan, if the borrower defaults on payment, the lender can confiscate the vehicle.
When a private individual or company takes out a mortgage, the property in question is used to secure the repayment terms. In fact, the lender will keep the equity on the property until the mortgage is paid in full. If the borrower defaults on payments, the lender can seize and sell the property to get the funds owed back.
Now let’s talk about unsecured loans. In contrast to secured loans, unsecured loans are taken out without a security deposit. If the borrower defaults on this type of debt, the lender will initiate a lawsuit to collect the amounts owed. In the case of an unsecured loan, lenders give monies and promise repayment solely on the basis of the borrower’s creditworthiness.
Banks charge a higher interest rate for the unsecured loans because they pose a high risk. Also, the creditworthiness and debt-to-income ratio requirements for these types of loans tend to be more stringent.
When issuing unsecured loans, banks check the creditworthiness of the borrower. Any past payment default can lead to the termination of the loan. In addition, the borrower’s financial situation is checked to see if they can repay the loan.
Examples of unsecured loans are personal loans, education loans, and credit card transactions. And when a bank finds that a loan or outstanding money is no longer collectible, it is called a bad loan.
The RBI said in a recent RTI response that banks have written off bad loans worth a whopping Rs 11.68.095 billion over the past 10 years. Apparently most of the loans were unsecured.
People who do not want to mortgage their assets or who do not have property to apply for a secured loan opt for the unsecured loan. It’s a great option if you’re looking for instant cash.