Collateral Free Loans – Features, Benefits, Interest Rates and Eligibility
Any loan that you can avail of without pledging collateral is known as collateral-free or unsecured loans. Most common example of a collateral-free loan is a personal loan. Since these are unsecured loans, the loan default risk is on the higher side.
Read on to know the features and benefits of collateral-free loans.
Collateral Free Loans Details
| Loan Amount | Rs.10,000 to Rs.40 Lakh |
| Interest Rate | 8% p.a. To 48% p.a. |
| Processing Fee | 0% to 5% of the loan amount |
| Loan Tenure | Up to 72 months |
What is Collateral?
Collateral is any valuable tangible or intangible asset that can be used as a security to avail of a loan. For instance, if you are applying for a home loan to purchase a new home, your new home becomes the security or collateral. In case you fail to repay the loan, the lender has the right to seize and sell your home to recover the loan amount.
Collaterals help in reducing the risk for lenders as it acts as a security against the entire loan or a part of it. You would need to pledge collateral for secured loans like home loan and car loan. That’s one of the reasons why secured loans have a lower interest rate than unsecured loans – where you don’t need to pledge collateral.
What are Collateral-Free Loans?
Collateral-free loans are unsecured credit facilities that do not involve any collateral. Collateral refers to any asset that you can pledge to obtain funds from financial intuitions. In most cases, you can use an immovable property as security. However, in certain cases, other assets such as gold and financial securities can be pledged too.
Borrowers get to avail such forms of credit without having to provide any guarantee. However, unsecured loans are more high-risk loans than secured ones. In order to mitigate the risk, lenders often charge higher interest rates on non-collateral loans so that they do not lose all the money in case of defaults. For borrowers, it is advisable to go for a small loan amount or longer repayment tenure to keep the EMIs affordable.
Features & Benefits of Collateral-Free Loans
Here are some features and benefits of collateral-free loans:
1. Flexible Repayment Terms
Generally, collateral-free loans provide the scope to choose a flexible repayment tenure. You can easily go for a longer repayment tenure to make your EMIs affordable. However, look out for the higher interest outgo in that case.
2. No End-Use Restrictions
Besides getting access to a sizeable amount without having to pledge any asset, you can use the funds to meet any financial requirement. The no end-use restriction feature allows borrowers to make use of the funds to fulfil various monetary requirements, for example, financing a child’s education, meeting expenses at the time of medical emergencies, etc.
3. Easy to Apply
The eligibility parameters are basic, and one can easily meet them while availing of a collateral-free loan. Although the eligibility criteria can vary across different lenders, the basic requirements are similar. Make sure to learn about both the eligibility parameters and documents required before applying for an unsecured loan.
Apart from these benefits, this form of financial assistance also comes with pre-payment facilities. However, if you are planning to pre-pay your personal loan, make sure to check the charges associated with it beforehand.
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Documents Required While Applying for Collateral-Free Loans
- A duly signed application form
- KYC documents like PAN cards, Aadhaar cards, voter ID cards, etc.
- Income proof
- Business proof
Eligibility Criteria for Collateral-Free Loans
To apply for a collateral-free loan, you must check out the points mentioned below:
- Your age should be within the bracket of 18 to 65 years
- You need to be an Indian citizen
- Your credit score should be above 650 with a clear credit history
- In the case of self-employment, the business must not be older than 5 years
- You must possess approval from the Department of Industrial Policy and Promotion (DIPP)
- You need to have a patron guarantee from the Indian patent and trademark office
How to Apply for Collateral-Free Loans?
The process to apply for collateral-free loans is mentioned below:
Step 1: Open the application or the website of the borrower.
Step 2: Go to the personal loan section
Step 3: Enter the loan amount and EMI amount along with the loan tenure.
Step 3: Keep all necessary documents, as mentioned above, handy.
Step 4: Click ‘Apply’.
Alternatively, you can also download the Navi app.
It is also advisable to use a collateral-free loan EMI calculator before submitting the loan application. This way, you can plan your finances better as you know how much you will have to bear each month to repay the loan.
Interest Rate and Charges of Collateral-Free Loans
The interest rate depends on multiple factors like your credit score, loan amount, etc. The interest rate can range from 8.30% to 36.00% p.a. on collateral-free personal loans. However, in the case of collateral-free business loans, the rate usually begins from 17% p.a.
Also Read: Apply For Instant Personal Rs. 15,000 Loan In India: Features, Benefits & Steps To Avail
Who Offers a Collateral Free Loan?
Most of the leading private and nationalised banks in India offer collateral free personal and commercial loans to customers. Many other private financial institutions also offer collateral free loans.
You can avail such loans from the comfort of your home by visiting their websites and submitting online applications.
Final Word
Since collateral-free loans are unsecured in nature, they can come with certain terms and conditions. Make sure you go through all that before initiating the application procedure.
Also, it is better to compare the interest rates offered by different lending institutions to make sure that the cost of borrowing the funds is affordable.
Frequently Asked Questions
The list of documents required varies from one lender to another. However, you need to keep the following documents to avoid any hassle:
• KYC
• Bank statements (last 6 months)
• Salary slips (last 3 months)
• Income tax returns
• Your business’s registration certificate (for self-employed individuals)
Personal loan interest rates depend on a range of factors. Lenders will check whether you fulfil the eligibility criteria and determine the risk involved. Depending on these checks, a lender finalises the interest rate on your loan. Therefore, improving your eligibility parameters can reduce a loan’s interest costs.
The eligibility criteria can differ depending on whether an applicant is salaried or self-employed. For instance, salaried employees aged between 18 and 60 years can avail such a loan. For self-employed, this usually ranges between 21 and 65 years.
Fixed Obligation to Income Ratio or FOIR is a measurement is metric that financial institutions utilise to calculate the loan eligibility of borrowers. Also referred to as the debt-to-income ratio, FOIR varies from one lender to another. That said, ideally, it should be anywhere between 40% and 55%.
You can avail an unsecured loan with a credit score of less than 750. However, to do so, you must apply with a co-borrower who has a CIBIL score of 750 or above. Some lenders may offer personal loans at higher interest rates if you have a poor credit score.
Ans: Repayment of collateral-free loans is quite flexible. You can opt to pay in either bi-weekly or monthly instalments over a tenure ranging from 1 to 3 years. Options for repayment include NACH (National Automated Clearing House) or other approved methods.
Ans: Yes, you can repay the entire loan amount in one single payment. The process of repaying the entire loan before the end of the tenure is called loan foreclosure. Depending on the financial institution, you may have to pay a certain fee for this facility.
