The Limitations of Unsecured Loans

If a person wants to start a business anywhere or even if a person to expand their own existing business then this may require money. In various circumstances individual has to borrow it from the third party who provides finance in the form of business loan or one can even approach bank or any other place which can provide a suitable loan.

In the financial market there exist two types of loans i.e. secured loans and unsecured loans. Basically unsecured loans are those loans which are provided to the person without any collateral i.e. they are not asked anything in return and the vice-versa takes place in secured loans. Generally, in this unsecured loan there occur chances of risks for lenders, however for this risk they are able to charge high rate of interest from the borrowers and thus earn huge amount of money. Although borrower good credit gives assurance that a people is capable of repaying the money, but most of the times it may occur as a risk factor for the lenders to get their money back as there’s no element are being collateral by the people. So, in order to overcome this situation several limitations on unsecured loans are made in different countries by judicial members. The most common limitations are:-

  • In real estate sector, there’s a schedule driven by board directors of company for unsecured loans process, thus the lending limits should not het exceeded by the schedule.
  • The limits for unsecured loans should be different for each member and the limits assigned should be according to the necessity of each member who wants loan and that inspection should also be done to the member in order to know that the creditor is actually worthy.
  • Based upon prudent practice of lending and procedures, all loans must be granted to any member. And there should written policies of lending and procedures that are prescribed by the directors must be taken into account.
  • Sometimes, the limits can be extended of the schedule for the member’s by examining the need of members and evaluating their unencumbered accounts of share.

Each country has their own limitations for their unsecured loans in order to make the unsecured loan lenders get rid of risks. Thus providing unsecured loans could be beneficial or sometimes generates risk too.