What Is an Unsecured Loan?
How an Unsecured Loan Works
Types of Unsecured Loans
Unsecured Loan Vs. Payday Loan
Special Takes into Account
Personal Finance Credit
Unsecured Loan
By James Chen
Updated February 22, 2021
Reviewed by Eric Estevez
Fact checked by Amanda Bellucco-Chatham
What is an unsecured loan?
An unsecured loan is a loan that doesn’t require any kind of collateral. Instead of relying on a borrower’s possessions as security lenders will approve unsecured loans based on a borrower’s creditworthiness. Examples of secured loans comprise personal loans, student loans and credit cards.
Important Takeaways
An unsecure loan is supported only by the creditworthiness of the person borrowing it and not by any collateral like properties or other assets.
Unsecured loans are more risky in comparison to secured loans for lenders, so they require higher credit scores for approval.
Credit cards, student loans as well as personal loans are all examples of unsecured loans.
If a borrower defaults on an unsecure loan the lender could commission a collection agency to collect the debt or take the borrower to court.
Lenders can decide whether or not to accept an unsecured loan in accordance with a borrower’s creditworthiness. However laws protect borrowers from discriminatory lending practices.
How to Use an Unsecured Loan
Unsecured loans–sometimes referred to as”signature loans or personal loans — are approved without the use of properties or other assets as collateral. The conditions of these loans as well as the approval process and receipt, are frequently contingent upon a person’s credit rating. Typically, borrowers need to have high credit scores to qualify for non-secured loans.1
A non-secured loan is different from secured loan that is when a borrower pledges some type of asset to secure the loan. The pledged assets boost lenders “security” in providing the loan. Examples of secured loans include car loans.1
Since unsecured loans require higher credit scores than secured loans, in some instances lenders will permit loan applicants who have poor credit to cosign for. A cosigner assumes the legal obligation of settling a debt if the borrower fails to pay. This occurs when a borrower does not pay back the principal and interest payments of a loan or debt.1
Since unsecured loans are not secured by collateral, they’re more risky for lenders. This is why these loans typically come with higher interest rates.
If a borrower defaults on a secured loan the lender may repossess the collateral to recoup the losses. If, however, the borrower fails to pay back an unsecured loan, the lender cannot take possession of any property. However, the lender may engage in other actions including directing a collection agency to collect the debt , or sending the borrower to the court. If the court rules in favor of the lender the borrower’s wages may be garnished.1
Additionally, a lien could be placed on the borrower’s home (if they have one) or the borrower may be otherwise ordered to pay off the debt. The consequences of defaults for borrowers, for example, less credit scores.1
Unsecured Loan
The types of unsecured loans
Unsecured loans are personal loans, student loans as well as the majority of credit cards–all of which can be revolving or term loans.
A Revolving loan is a loan with a credit limit that can be used, repaid and then repaid. Examples of revolving unsecure loans include credit cards and personal loans.
A term loan is, however, is a loan which the borrower pays back with equal payments up to the point that it is loan is paid off when it has reached the conclusion of its term. Although these kinds of loans are often affiliated with secured loans, there are also unsecure term loans. For example, a consolidation loan for the purpose of paying off credit card debts or a personal loan from a financial institution could be considered unsecured loans.1
In recent times, the unsecured loan market has been growing driven by the fintechs (short of financial technology firms). The past decade, for example, has seen the rise of peer-to-peer (P2P) lending via online and mobile lenders.2
$979.6 billion
Amount of U.S. consumer revolving debt in October 2020 as per the Federal Reserve. 3
If you’re planning to take out an unsecured loan to cover personal expenses A personal loan calculator is an excellent tool for determining the amount of your monthly payments and total interest should be for the amount you’re looking to take out.
Unsecured Loan vs. Payday Loan
Alternative lenders, such as payday lenders or firms that offer merchant cash advances are not able to provide secured loans in the traditional sense. They’re loans do not have collateral that is tangible, the way that mortgages and auto loans are. However, these lenders take other measures to secure their repayment.
Payday lenders, like will require that customers give them a postdated check or consent to withdrawing automatically from their checking accounts to pay the loan. A lot of online loan lenders require the borrower to pay a certain percentage of online sales through an online payment processor like PayPal. These loans are considered unsecured although they are secured.4
Payday loans could be considered to be in some ways as predatory loans as they have a reputation for having extremely high rates of rates of interest and hidden terms that cost borrowers additional fees. In fact, some states have banned them.4
Special Beacons
Although lenders are able to decide whether or not to grant an unsecured loan by assessing your creditworthiness, the law protects consumers from unfair lending practices. The passage of the Equal Credit Opportunity Act (ECOA) in 1974, for example, made it illegal for lenders to make use of race or color, sexual orientation, religion, or other non-creditworthiness factors when evaluating a loan application, establishing terms of a loan, or any other aspect of an unsecured credit transaction.
While lending practices have gradually improved in the U.S., discrimination still is a reality. In July 2020 the Consumer Financial Protection Bureau (CFPB) which is the primary authority in supervising compliance and enforcing the ECOA issued a Request for Information soliciting public feedback to determine the best ways of improvement of the work that the ECOA is doing to ensure that there is no discrimination in access to credit. “Clear standards ensure the protection of African Americans and other minorities However, the CFPB should back them with actions to ensure lenders and others follow the law,” stated Kathleen L. Kraninger, director of the CFPB.5 6
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Personal Loan Guide
Personal Loan: Definition, Types, and How To Get One
1 of 33
Understanding Different Loan Types
2 of 33
Unsecured Loan
3 of 33
Signature Loan
4 of 33
What Is Peer-to-Peer (P2P) lending? The definition and the way it operates
5 of 5 of
What is a Payday Loan? How Does It Work, How to get One and Legality
6 of 33
Personal Loan Calculator
7 of 33
Are Personal Loans Tax Deductible?
8 of 33
Are personal loans considered income?
9 of 33
Can Personal Loans Be Included in Bankruptcy?
10 of 33
Can personal loans be transferred to a different person?
11 of 33
How personal loans affect your Credit Score
12 of 33
What is an Amortization Schedule? How to Calculate It Using Formula
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Personal Loan Interest Rates: How a Personal Loan Is Calculated
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How do I apply for Personal loans
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Best Personal Loans
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Best Small Personal Loans
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Best Bank Loans
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Best Peer-to-Peer Lending
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Personal loans with low interest loans
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Best Online Personal Loans
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The Best Loans for Bad Credit
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The Best Loans for Fair Credit
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The best personal loans for those with good credit
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The Best Loans for Outstanding Credit
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Best emergency loans for people with bad Credit
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Debt Consolidation Loans for Bad Credit
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Best Consolidation Loans to Condense Debt
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Best Home Improvement Loans
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The Best Personal Loans with an Authorized Co-Signer
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Personal Loans in contrast to. Credit Cards What’s the Difference?
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Personal Loans vs. Car Loans: What’s the Difference?
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8 Ways to raise cash than car title loans
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Related Terms
Signature Loan
The signature loan is a type of personal loan offered by banks and other finance companies that relies only on the signature of the borrower and guarantee to pay the loan as collateral.
more
Default: What Does It Mean, What Happens When You Default, Examples
A default occurs when a person who is borrowing fails to pay the required amount on a debt, whether of interest or principal.
more
Collateral Definition, Types, & Examples
Collateral is an asset that a lender accepts as security in order to extend an loan. If the borrower defaults the lender can take possession of the collateral.
more
What is a Payday Loan? How It Works, How to obtain One and also the legality
A payday loan is a type of short-term borrowing where a lender will provide high-interest credit according to your earnings.
More
What Is a Creditor, and what happens if they aren’t paid?
A creditor lends credit to another person to take money, usually through the terms of a loan arrangement or contractual.
more
Non-Recourse Debt: Definition, Example, vs. Recourse Debt
A non-recourse loan is a kind of loan that is secured by collateral, commonly property, and the lender assumes a greater risk in the event that the borrower fails to pay on the loan.
more
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