What is an Unsecured Loan?

by Contributing Writer ; Updated July 27, 2017

An unsecured loan is a loan that is granted without any collateral. The borrower agrees in writing to repay the loan, but nothing secures it. Accordingly, unsecured loans are sometimes referred to as signature, or good faith loans. If the borrower defaults, the lender cannot seize an asset in lieu of payment.

Examples

A purchase made with a credit card is an example of an unsecured loan. Some personal loans are also unsecured.

Eligibility

Because eligibility is based entirely on the borrower's creditworthiness, individuals with poor credit will have more difficulty obtaining an unsecured loan.

Usefulness

An unsecured loan can be a quick and convenient financial solution for a short term need or in the event of an emergency.

Costs

Unsecured personal loans are riskier for the lender and will therefore usually have higher interest rates and fees associated with them.

Risks

An unpaid unsecured loan can force a borrower into bankruptcy, destroying his credit rating for years to come and making it impossible for him to borrow funds under any circumstances.