Unsecured Loan
A loan with no collateral, approved based solely on the borrower's creditworthiness and income.
What is Unsecured Loan?
An unsecured loan has no collateral backing it — the lender has no specific asset to seize in the event of default. Instead, the lender relies on the borrower's credit score, income, and debt-to-income ratio to assess repayment likelihood. Because unsecured loans expose the lender to higher risk, they carry higher interest rates and stricter qualification requirements than secured loans. Common examples include personal loans, student loans (federally backed), and most credit cards. If the borrower defaults, the lender's recourse is legal action — wage garnishment, court judgments — not asset seizure.
Example
A borrower with a 720 credit score obtains a $15,000 unsecured personal loan at 11% APR to consolidate credit card debt. There is no collateral — if the borrower defaults, the lender cannot repossess property. In contrast, a secured home equity loan at 7% APR would require pledging home equity. The 4-percentage-point premium on the unsecured loan reflects the lender's additional risk. Higher-risk borrowers with lower credit scores may face 20–30% APR or denial.
Source: Investopedia — Unsecured Debt