Unsecured personal loan
What is an unsecured personal loan?
An unsecured loan occurs when someone lends money without requiring collateral. For example, if you borrow $3,000 from a credit union with nothing but your signature as a promise that it will be repaid, it is considered an unsecured personal loan.
When you’re granted an unsecured personal loan, the lender bases the decision to make that loan on your creditworthiness. The lender knows that if you fail to repay, it has no recourse and no collateral that will help it recoup the loss.
A traditional, secured loan works like this: You borrow money but have something the lender can repossess if you default on loan payments. For example, you borrow $20,000 to purchase a car and you stop making car payments after a few months. According to your car loan contract, the lender has the right to repossess car and sell it to recoup some of its money.
An unsecured loan is not guaranteed by any property you own, making it a bigger risk for lenders. For that reason, unsecured personal loans normally carry higher interest rates than traditional loans. Because of the greater risk, you generally need a high credit score to qualify for an unsecured personal loan.
Here are seven ways to improve your credit score.
Unsecured personal loan example
- Credit cards — Because credit cards are unsecured personal loans, interest rates associated with some cards are very high.
- Personal loans — Apply for a personal loan, also called a signature loan, at your financial institution to pay for a vacation or other expense without collateral.
- Personal lines of credit — You might take out a personal line of credit if you own a business and are waiting for a trusted client to pay you. Once you pay that loan back, the line of credit remains open and you can borrow from it again.
- Student loans — Lenders only have your word that a private student loan will be repaid. Looking for ways to lower your student loan payment? Learn more here.