What Is an Unsecured Loan?

Unsecured Loan Definition

An Unsecured Loan is a loan that is issued and backed by a borrower’s credit worthiness rather than collateral, such as a car or house.

The terms of the loan are therefore contingent on the borrower and his/her credit score, rather than the value of their collateral.

Because unsecured loans aren’t secured by assets, they are riskier for lenders, and so they typically carry higher interest rates and require high credit scores.

Likewise, if the borrower defaults on their loan, the lender may have the grounds to bring them to court or send a collection agency to retrieve the debt.

Types of Unsecured Loans

There are two main types of unsecured loans:

1.) Revolving Loan

A revolving loan is a loan that has a credit limit.

The borrower can spend up to that limit, and then must reduce a portion of the debt to below the set credit limit in order to borrow again.

Credit cards are a common example of a revolving loan.

2.) Term Loan

A term loan is a loan that a borrower pays in regular installments until the full balance is paid off.

This is one of the most common loan structures, whether secured or unsecured.

This type of loan is considered non-revolving because once the principal is paid back, the terms of the loan have ended.

Consolidation Loans

On rare occasions, an individual may be able to take out a consolidation loan, or a loan to pay off existing loans and debts.

This type of loan will often be unsecured.

What is an Unsecured Loan FAQs

An unsecured loan is a loan that is issued and backed by a borrower’s creditworthiness rather than collateral, such as a car or house.
The terms of the loan are therefore contingent on the borrower and his/her credit score, rather than the value of their collateral.
On rare occasions, an individual may be able to take out a consolidation loan, or a loan to pay off existing loans and debts. This type of loan will often be unsecured.
The two main types of unsecured loans are revolving loans and term loans.
Because unsecured loans aren’t secured by assets, they are riskier for lenders, and so they typically carry higher interest rates and require high credit scores.