Loans without collateral are cheaper and easier to service. They are usually advanced to individuals with a sound business plan in the form of capital goods like cows or processing machines. The loanee services the loan from the proceeds of the investment. The risk of failure is low since the lending agency sends assessors to determine the viability of the business. Have you ever used such facilities? In case of non performance, the loanee does not suffer financial shock when the capital good advanced is repossessed.
The only collateral-free loan that I know are those Indian lenders who charge usurious rates of 20% per month. In the 1970s, the Philippine government instituted a loan system for small business like market vendors, barbershop, etc. The loan is given to the borrower in the agreement that it would be paid in installments. After some years, the institute became bankrupt because 99% of the borrowers did not pay back simply because there was no collateral and their seem not to be liable anymore.
As long as loans are concerned, I haven't come across one that is collateral free. For a while now, I have been in need of a loan to start a business and every lender I have approached needs security of some form. The closest I have come to some sort of a collateral free loan is being told that to qualify, I should have a business that has ran at least for five years. It also must have sound financial records.
No collateral loans are no different from informal loans. There's no written contract between the creditor and the debtor and the agreement is exchanged verbally. This usally happens between families and friends. Should the debtor refuse to pay, he can't be sued because of the absence of a contract. Only his conscience would prevent him from taking advantage of the creditor.
There are some loans which might be offered by credit unions as long as guarantors offer to pay the money borrowed should the person who gets the loan default. I haven't heard of these other loans where you get money for a business and pay if your business is profitable. It does sound good. What's the worst those who loan you the money do? Take back their processing machine or cow obviously which leaves you no worse (off) than you were.
Loans without collateral are very risky both for the lenders and the economy. This makes them attract very high interest rates to mitigate this risk. The loanee has an incentive not to honor the terms of the loan as they do not risk losing much.
You can get loan without a collateral through micro finance/credit programs/institutions, however interest rate is higher than the loan that you get through collateral. In our home country, the normal interest rate for the loan with collateral is about 9 percent where as loan without collateral is 15% and higher.
I started an offline business with the loans without collateral and it's going great. The company gave six dry cleaning machines. I had a site for the business and marketing wasn't a problem. I already had two machines and this increased my chance for the collateral loan. These loans are of benefit if you have a running business. It sounds easy to get them but they are not reliable. In some cases you have to show you are capable of paying them. It's not easy to repair your credit if you fail to pay this loan in time.
I am yet to see this kind of a system where loans are given out without collateral. With that said, I will be glad to be a loanee in an arrangement like this, I'm sure not to default. The problem sometimes is people that genuinely want to do business with excellent ideas may not have the collateral to enable them secure loan from the bank.
A credit card loan is a type of loan with no collateral. I used this facility to finance a utility vehicle business. The bank/credit card company offered me a loan with an effective interest rate of 8% which I grabbed to pay half the cost of a second hand vehicle with an existing franchise. Nowadays, it is not easy to get a regular non-collateral loan at all as most banks will require you to submit project feasibility studies and other documents that will prove your capacity to pay. You will also be subjected to a credit investigation. As some have mentioned, the interest is also typically higher than loans with collateral.
In my younger days, I was beset with loans of different kinds that I thought I would file for bankruptcy. When I was able to recover my good credit standing, I pledged to myself that I would stay away from loans. Actually, those no collateral loans are very tempting and they contribute to the misery of the debtor. And I believe that a loan with no required collateral means a higher interest.
Loan that requires no collateral is usually or generally required a co-maker of two or three persons who could assume the liability of paying the loan in case the borrower couldn't repay the loan granted to him. I have been working the rural bank for 5 years and I had served several loans with no collateral like the salary loan to the teachers, government employees. This kind of loan is fully secured by the character and capacity of the co-makers in case of non-payment of the borrower.
I don't think collateral free loans are cheaper. You get collateral free loans from independent investor/financier or from micro-finance institutes. If you are processing loan from banks,you are always required for collateral. In most cases collateral free loans have high interest rates.
I borrowed money from a lending company and they charge 5% per month. That's a big value compared to collateral loans. There's always a catch.
