TOP CONTRIBUTORS

Charles Armstrong

The Daily Angle

Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.

Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.

Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.

Commercial Paper is a notable unsecured loan.

Examples

• A man faces an unexpected, immediate expense (perhaps he suffers a medical emergency) and needs to procure money immediately. Because he has excellent credit, he is able to procure a short-term unsecured loan from his bank to pay for his expenses.

• Two friends are going to a football game. One of them has left his wallet in the car, a fact which he does not realize until they reach the ticket window. The friend who still has his wallet pays for both tickets on the condition that the wallet-less friend reimburse him as soon as they reach the car. As no collateral was offered, this is an unsecured loan.

See Also

• Secured Loan
• Debt
• Collateral