An unsecured loan is a type of loan that is not backed by any collateral (such as property, car, or savings). This means the lender does not have any specific asset they can claim if the borrower fails to repay the loan. Instead, the loan is given based on the borrower’s creditworthiness, income, and financial history.
Because there is no collateral, unsecured loans tend to carry higher interest rates compared to secured loans (like mortgages or car loans), as the lender is taking on more risk. Common examples of unsecured loans include:
- Personal loans
- Credit cards
- Student loans
- Medical loans
If the borrower defaults on an unsecured loan, the lender can still pursue other means of recovery, such as legal action or reporting to credit agencies, but they cannot seize specific assets.
