Over the past couple of years, personal loans have gained a significant amount of popularity across India, mainly due to the emergence of a number of lenders who now specialize in rendering this service. Given the wide-scale popularity of this financial instrument, I am sure that during your research of personal loans, you have come across the term collateral-free personal loan at least once. But what does a collateral-free personal loan actually mean?
Let us understand that in today’s blog post.
What Is a Personal Loan?
Before we dive deeper into understanding the essence of a collateral-free personal loan, one of the first and most important aspects we need to understand is the meaning of a personal loan.
In simple terms, a personal loan can be understood as a financial instrument which you can leverage to borrow a certain amount of funds, usually in the range of ₹10,000 to ₹500,000 and repay it via EMIs while enjoying a flexible repayment plan.
Now, in India, there are two main types of personal loans available. The first is an unsecured personal loan, which is undoubtedly one of the most popular, and the second one is a secured personal loan.
An unsecured personal loan, as the name suggests, is a personal loan wherein you are not required to pledge any asset or security in order to take advantage of this loan. Since you do not need to pledge any collateral for this type of loan, these are also alternatively known as collateral-free loans, and a majority of the personal loans available to consumers are collateral-free in nature.
Now, next to a collateral-free personal loan, there is a secured personal loan, and as the name suggests, you need to pledge an asset or collateral as security in order to take advantage of this personal loan. While it is true that secured personal loans often come with better interest rates and affordable EMIs, it cannot be ignored that this is a costly option to afford for many, as arranging collateral for getting a personal loan can be challenging.
Advantages of Collateral-Free Personal Loans
Now that you have understood the essential meaning of a collateral-free personal loan, let us take a look at some of the advantages these financial instruments arrive with.
- 100% Online and Paperless Process
When compared to a secured loan or a traditional loan where you need to physically visit the lender’s premises and submit your loan application along with documentation of the collateral you are willing to pledge, a collateral-free personal loan arrives with a completely online and 100% paperless process.
Essentially, this offering translates into the fact that you can complete the entire loan process from start to finish right at the comfort of your home.
No need to wait in long queues or submit paperwork; everything in the application process, right from populating the requested information to securely uploading your documents onto the server of the lender, can be done from anywhere, making it possible for anyone to access a personal loan at a time of need.
- Instant Approval
One common hassle with secured personal loans continues to be the fact that the lender needs to spend an additional amount of time and resources to verify the legitimacy of your assets, which essentially translates into a longer wait time for you.
On the other hand, since in a collateral-free loan, all the lender needs to do is check your credit history, the assessment and subsequent approval process is instant, ensuring that you have access to the funds when you need them and not at a later stage.
Along with this, most modern lenders in India make use of advanced fintech technology, which equips them with the capability to instantaneously access the credit history of borrowers and make use of advanced AI and ML algorithms to assess your creditworthiness thus further increasing the speed of approval and loan disbursement.
- Freedom to Spend
Last but not least, in a collateral-free personal loan, the lender allows you the opportunity to spend the loan amount in any area of your choice without needing to inform them beforehand. As compared to a traditional loan, wherein you have an inherent limitation on the spending avenue, such as in, home loans and vehicle loans, you have the complete liberty of using the personal loan amount to meet your any or all needs, right from a medical emergency to paying the downpayment of your first two-wheeler.
- Competitive Rates of Interest
As the personal loan industry in India continues to mature, there is a steady rise in the demand for collateral-free personal loans, which has made it easier for lenders to offer competitive rates of interest to borrowers. For instance, Money View, which is a leading lender based out of Bengaluru, offers a rate of interest starting from 1.13% a month, making it possible for every borrower to access a personal loan to meet their needs.
Disadvantages of Collateral-Free Personal Loans
Similar to everything else in life, collateral-free personal loans do come with certain disadvantages as well, and some of the most significant ones are as shared below.
- Greater Impact on Credit Score
Since in a collateral-free personal loan, the lender has no other form of security against their risk other than your creditworthiness, it is only natural that a collateral-free personal loan will have a greater impact on your credit score.
This essentially translates to the fact that if you take out a collateral-free personal loan and pay back your obligations on time, your credit score will increase by leaps and bounds, while if you fail on your timely repayments, your credit score will be negatively affected.
Thus, you need to keep this in mind before taking a collateral-free personal loan.
- Costlier EMIs
Last but not least, it has been observed that collateral-free personal loans generally have costlier EMIs as compared to secured personal loans. You can simply understand this as the cost of convenience as these loans generally arrive with a host of features missing from secured loans.
Today you can avail the services of a collateral-free personal loan at the tap of a finger. All you need to do is look up a lender of your choice and proceed to apply for a collateral-free personal loan.
Now that you know what is a collateral-free personal loan, what are you waiting for? Go ahead and apply for one today.