Unsecured Loan

Unsecured loan summary:

• Unsecured loans don’t require collateral. That means you’ll qualify based on your creditworthiness and financial situation, not whether you own something valuable you could use as a guarantee.

• Unsecured loans are riskier for the lender, so they tend to cost more than secured loans.

• Common examples of unsecured loans are student loans, most personal loans, and most credit cards.

Unsecured loan definition and meaning

An unsecured loan isn't guaranteed by collateral. There's nothing the lender could take and sell if you don't make your payments. The lender's only security with an unsecured loan is your promise to repay. For this reason, unsecured loans are sometimes called signature loans. Because unsecured loans are riskier to lenders than secured loans, they can be harder to get and their interest rates are usually higher. 

More about unsecured loans

When you borrow with an unsecured loan, you don't put up collateral. That means there’s nothing the lender could take, or repossess, if you don't repay your balance according to the terms of your loan agreement. The lender would have to come after you for repayment by contacting you, turning your account over for collection, selling your debt, or suing you. 

Advantages of an unsecured loan

The biggest advantage of an unsecured loan is that you don’t have to own anything of value that you could borrow against. Also, unsecured loans can be much faster to get because there’s no collateral to evaluate. 

Disadvantages of an unsecured loan

Unsecured loans have a couple of drawbacks. They can be more difficult to get if your credit score is low or your income is unstable. 

Unsecured loans are riskier for lenders, because there’s no collateral for them to take and sell if you don't repay the loan. To recover what they're owed, lenders could contact you, turn your account over to collections, or possibly sue you. These strategies can be time-consuming and expensive with no guarantee of success. That’s why unsecured loans generally carry higher interest rates compared to secured loans.

Common types of unsecured loans

• Most credit cards

• Student loans

• Unsecured lines of credit

• Most personal loans

• Medical balances