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What Is an Unsecured Loan?

An unsecured loan is a kind of loan that does not require the borrower to provide any collateral (any property or asset that is pledged to ensure that the lender will have his money back in case the borrower forfeits on the loan). In lieu of collateral, the borrower has to sign an agreement with the terms of the loan clearly spelled out. Unsecured loans are also called signature loans and personal loans.

In most cases, unsecured loans do not involve high amounts of money. They are often meant to deal with urgent financial needs. There are many kinds of unsecured loans, perhaps the most basic one being an informal loan from a friend or family member. This kind of loan is considered an unsecured loan when an I.O.U. is written out.

While it may not be immediately obvious, credit cards are also a form of unsecured loans. If you think about it, when you use a credit card, you are borrowing money from the credit card company. You do not have to put up collateral, but instead you have signed an agreement - when you applied for the card - to pay off whatever purchases you have made.

For most people, an unsecured loan is taken out of the bank, a credit union, or some other financial institution. When applying for an unsecured loan, the borrower has to expect a credit and background check. Depending on the requirements of the financial institution, an unsecured loan application may be denied or approved.

Since the lender does not require any collateral, unsecured loans may have a higher interest rate as compared to other types of loans.

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