In recent years, unsecured loans have become increasingly popular across India. Thanks to fintech companies, banks, and non-banking financial companies (NBFCs), availing an unsecured loan is now easier than ever. With just a few clicks on your smartphone or a short visit to a branch, you can get quick cash without offering collateral like property or fixed deposits. But is this easy availability truly a blessing, or does it carry hidden risks? This article explains what unsecured loans are, their pros and cons, and how you can use them wisely without falling into debt traps.
What is an Unsecured Loan?
An unsecured loan is a type of loan that does not require any collateral. This means you don’t have to pledge your home, car, or other assets to get the loan. Personal loans, credit card loans, and payday loans are common examples. Because the lender takes a higher risk lending without security, these loans often carry higher interest rates compared to secured loans like home loans.
Why Are They So Easy to Get?
India’s growing digital economy and competition among lenders have made unsecured loans widely accessible. Fintech apps can process loan applications online in minutes, with minimal paperwork and quick disbursal. This convenience appeals to many, especially young professionals and salaried employees who need money fast for emergencies, travel, or lifestyle expenses.
Benefits of Easy Access
Quick financial help in emergencies: When medical bills or urgent repairs arise, unsecured loans can provide timely cash without delay.
No collateral required: You don’t risk losing assets if you can repay the loan on time.
Simple application process: Online applications, minimal documentation, and fast approval are convenient.
Flexible use: You can use the loan for any purpose — travel, education, debt consolidation, or even leisure.
Hidden Risks
1. High Interest Rates and Fees
Since unsecured loans are riskier for lenders, interest rates can range between 12% and 24%, sometimes even higher for short-term loans. Unlike secured loans, where rates are lower due to collateral security, these rates increase your total repayment amount substantially.
Example: If Priya borrows Rs 1,00,000 as a personal loan at 18% annual interest for 2 years, she will repay roughly Rs 1,22,000 including interest. This higher cost can strain monthly budgets, especially if multiple loans are taken.
2. Easy Borrowing Can Lead to Overspending
With many companies aggressively marketing unsecured loans, people may be tempted to borrow for non-essential expenses or to maintain lifestyles beyond their means. This can spiral into multiple loans and mounting debt.
Example: Ankit takes an unsecured loan to buy a new smartphone and also uses his credit card for travel. Soon, he struggles to repay EMIs and credit card bills, leading to stress and default risks.
3. Risk of Falling Into Debt Traps
If borrowers are unable to repay on time, penalties and interest accumulate, making it harder to clear the debt. This can damage credit scores, limiting future access to credit or increasing loan costs.
4. Impact on Credit Score
Missing EMIs or defaulting on unsecured loans negatively impacts your credit rating, making it difficult to obtain loans or credit cards in the future. A poor credit score also means higher interest rates on subsequent loans.
How to Borrow Responsibly
1. Assess Your Actual Need
Borrow only what you truly need. Avoid taking loans for impulsive purchases or non-essential spending. Create a clear repayment plan before applying.
2. Compare Interest Rates and Terms
Do not accept the first offer you receive. Compare rates from multiple lenders, including banks and NBFCs, to find the best deal. Check processing fees, prepayment charges, and other hidden costs.
3. Check Your Repayment Capacity
Before borrowing, calculate your monthly income and expenses to ensure you can comfortably pay EMIs without compromising essential needs.
4. Read the Fine Print
Understand loan terms, interest calculation methods (reducing balance or flat rate), and penalties for delayed payments. Clarify doubts with the lender before signing any documents.
5. Use Loans for Productive Purposes
Use unsecured loans for purposes that can improve your financial situation, such as education, skill development, or consolidating higher-interest debts. Avoid borrowing to fund lifestyle inflation.
6. Build an Emergency Fund
Ideally, maintain a savings buffer of 3–6 months’ expenses. This reduces dependency on loans for unexpected costs.
Real-Life Scenario
Sunita, a 35-year-old teacher in Pune, received an offer for an unsecured loan of Rs 2 lakh with an 18% interest rate. She considered using it to renovate her house but decided to carefully calculate her EMIs before borrowing.
Sunita’s monthly EMI would be around Rs 10,000 for two years. Since her monthly income was Rs 45,000 and monthly expenses were Rs 30,000, she realised the loan repayment would leave little room for emergencies. Instead, she opted to save for six months and borrow only Rs 1 lakh for partial renovations. This cautious approach helped her avoid overburdening debt.
Final Thoughts
Unsecured loans offer a convenient way to access funds without collateral, but easy availability can be a double-edged sword. While useful in emergencies, they carry higher costs and risks that can worsen financial health if misused.
[The writer has a keen interest in business and the dynamics of stock markets]
