Unsecured Loans


An unsecured loan lets people borrow money from a financial institution without a specific designation for the money. ‘Unsecured’  typically denotes the absence of collateral value for the borrowed money in the event of an unforeseen circumstance preventing someone from repaying the balance.

Therefore, those who are responsible for lending the money are much more vulnerable to the results of the transaction than are the people seeking the loan. Lenders have the ability to take negligent or recalcitrant accounts to court, but typically hold borrowers accountable with much steeper interest stipulations to offset their vulnerability.

A person’s credit rating is a crucial factor when considering an unsecured loan as a person with a poor rating will be subjected to less desirable rates than someone who has a strong credit rating. Further, if a person’s credit rating is rather poor or non-existent then they will typically have to seek out someone to co-sign for the loan who does have an acceptable credit rating and the ability to repay the balance of the loan in the event of unforeseen circumstances.

It is also important to understand that these types of loans are much different than a loan a person would require in order to purchase a home. In the event a person is seeking a loan for their home, it is the property itself that acts as a type of collateral value to offset the risk involved in lending money to someone for such reasons.

types of credit chart


The first type of unsecured loans are known as signature and they indicate that a person has signed an agreement to repay the money they were lent. These loans are available at almost any financial institution and do not restrict the resources that you utilize. The structure of these loans is such that a person can receive a lump-sum and then must repay the balance in agreed-upon monthly payments. Further, this type of loan can help someone establish a sturdier credit position by following through with the payment plan for the balance.

A credit card is really just another form of an unsecured loan, too. A credit card is much different than simply exchanging your signature for loan because that practice will result in gaining a large, one-time payout as to where a credit card is more of an ‘on demand’ scenario where a person can use resources associated with the credit as they are required. The caution with credit cards is that they almost always incur a substantial interest rate to, once again, offset the lack of collateral for risk. Subsequently, it is very easy to become mired in a pool of debt resulting from interest rates that were irrational to become involved with in the first place.

There is also an unsecured loan option for students, which help aspiring young people to be able to afford a place to live and cover tuition costs while they are away from home and a stable means of financial support. These loans also differ from typical loans in the sense that there is way more flexibility and understanding concerning the ability to stick to payment plans and timing arrangements for borrowing. Naturally, it goes without saying that you must be enrolled in a legitimate and recognized educational program in order to be considered eligible for this type of loan.

Finally, there are unsecured loans that allow people to borrow from one another without the involvement of a financial company and they are referred to as peer to peer. There are a number of platforms in existence to request a loan and hope for someone to lend to you with a reasonable interest rate for the repayment installations. Always remember to keep an eye on your credit rating as it can be consequential in any of the aforementioned scenarios.