Clean/Unsecured advances are granted to customers of integrity with a sound financial backing, high business reputation and capacity to manage the business. In such a case, the general capacity of the customer is security in itself. To safeguard his position a banker lends on personal security, coupled with the guarantee of one or, more persons. It is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Unsecured advances include credit cards, student loans, and personal loans, all of which can be revolving or term loans.
The Banking Regulation Act defines unsecured loan as – “unsecured loan/advance means a loan/advance not so secured.”
Confidence in the borrower is the basis of unsecured advances & the confidence is judged by “Character, Capacity & Capital”.
Borrowers must usually have high credit ratings to be approved for certain unsecured advances. These advances are superior risks for lenders, and as a result, they naturally have higher interest rates and require higher credit scores than secured loans such as mortgages or car loans.
The definition explains the two essential features of unsecured advances:
- The advance may be made on the personal security of the borrower
- This advance is not so secured.