Unsecured loan defined

Writer and editor - Bryan Robinson | Updated on 2023-03-05

An unsecured loan is a loan that is not backed by collateral. This means if you default on the loan, the lender does not have the right to seize an asset, such as your home or car, to recoup its losses. Unsecured loans are also sometimes called signature loans or personal loans.

What is an unsecured loan?

There are two types of unsecured loans: installment loans and revolving loans. Installment loans are repaid in equal monthly payments over the life of the loan. Revolving loans, such as credit cards, have a variable interest rate and allow borrowers to make minimum payments each month.
Unsecured loans are often used for debt consolidation or to finance major purchases, such as home renovations or a wedding. They can also be used for small purchases, such as furniture or appliances.

The interest rate on an unsecured loan is generally higher than the interest rate on a secured loan, such as a mortgage or auto loan. This is because unsecured loans are considered to be more risky for lenders. Borrowers with good credit scores will usually qualify for lower interest rates than those with bad credit scores.

Unsecured loans can be obtained from banks, credit unions, and online lenders. The application process varies depending on the lender but generally includes a credit check and proof of income.

Advantages of unsecured loans

There are a number of advantages to taking out an unsecured loan, including:

  • No collateral required: Because unsecured loans are not backed by collateral, they are generally available to borrowers with a wide range of credit scores.
  • Flexible loan terms: Unsecured loans typically have shorter repayment terms than secured loans, which means they can be paid off more quickly. Additionally, borrowers may have the option to choose a fixed or variable interest rate.
  • Lower interest rates: Interest rates on unsecured loans are typically lower than rates on secured loans because the lender has less risk if the borrower defaults.
  • No prepayment penalties: Borrowers who want to pay off their loan early will not be penalized with a prepayment fee.

Disadvantages of unsecured loans

One of the main disadvantages of unsecured loans is they typically come with higher interest rates than secured loans. This is because lenders see them as a greater risk – if you default on an unsecured loan, the lender has no way to recoup their losses.
Unsecured loans also tend to be smaller in size than secured loans, which can make them less useful for major expenses. And finally, because unsecured loans are not backed by collateral, they can be more difficult to qualify for if you have bad credit.

How to get an unsecured loan

To get an unsecured loan, you must first qualify as mentioned earlier, then simply agree to repay the loan, with interest, over a set period of time. The lender then gives you the money you have requested.

Bryan Robinson

Bryan Robinson
Writer and editor

Bryan Robinson is a finance writer with expertise in lending and their interest rates, fees, contracts and more.
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