A personal loan is used to fulfill one's personal needs-it may be to fulfill your long due dream holiday tour or to pay tuition fee of your child or to buy your dream sports car...An unsecured loan is the loan which you get without offering to the lender any of your asset as security. Therefore, an unsecured personal loan is taken without offering any security against the loan taken.
Usually any loan is taken for specific purposes such as you take an auto loan purchase a bike o a four-wheeler. You take home loan to buy a house of your own. You take home improvement loan to refurbish your house. However, at time we you need cash to spend on anything of your choice. Loan for your specific choice may not be available. In such cases you take personal loan and the loan amount is credited directly in your savings bank account. Once you have money in your account, you can withdraw cash and spend on whatever you want. There is absolutely no restriction on the use of money from lenders side.
Another common situation of taking personal loan is when you need money for a short duration. You want to serve your purpose and return the loan as soon as you have your own money.
Lenders offer unsecured personal loan to people who have either a permanent job or is self-employed for more than a year. A permanent job or self-employment for more than a year show that you have a permanent source of income and therefore you can repay the loan borrowed from the lender. Further, you also need a savings bank account, residence proof, identification proof and a recommendation from any of your relative or friend or landlord is most preferred.
Loan amount is decided on the basis of your monthly or annual income and expense, whether you are currently making payments for another loan etc. Since, it is an unsecured personal loan, you do not offer the lenders any security against the loan taken, which enhances risk associated with the loan taken. To partially compensate this enhanced risk, lenders charge a little higher rate of interest than the rate of interest they would have charged in case of a secured personal loan.
Duration of the loan is based on the loan amount finally offered to you and rate of interest to be charged. Once duration of loan is decided, the total amount to be paid by you is calculated which is further broken down in terms of monthly payment you. This monthly payment is called Equated Monthly Installment or EMI.
To conclude, an unsecured personal loan is taken without offering any collateral to lenders. This amount can be spent for any purpose of your wish; there is no restriction from the lender’s side. However, an unsecured personal loan comes at a little higher rate of interest, which makes it little costly.
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Source: http://www.articlealley.com/article_212749_19.html
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