An unsecured loan is one that does not require any properties or assets as a form of collateral. It is a collateral-free loan where the lender provides unsecured loans based on the creditworthiness of the borrower. Some examples of unsecured loans include, business loans, personal loans, private loans, student loans and credit cards.

How it works?

Unsecured loans are at times referred to as personal loans or signature loans and are approved without the need for property and assets set as collaterals. The terms of the loan, including its approval and rejection are all dependent on the borrowers' credit score. Usually, the borrowers must have a very high credit score to avail unsecured loans. Unsecured loans are a contrast to secured loans where the borrower pledges some personal or business assets as a collateral. These collaterals act as a security to the lenders who provide the loan.

Although unsecured loans usually require a higher a credit score, but in some cases the lenders will provide unsecured loans for persons with insufficient credit if they provide a cosigner. The cosigner has the responsibility to pay the debt if the borrower fails to repay the interest and the principal payments of a loan. A person with defaults in regards to loan or debt can face consequences like getting low credit scores.

Types of Unsecured loans

There are two main types of unsecured loans which are revolving loans and term loans. A revolving loan is a loan with credit limit, which can be spent, repaid and spent again, the prime example of this type of loan is credit cards and personal line of credits. A term loan on the other hand is where a borrower repays the amount in installments until it is paid off. Term loans are often associated with secured loans but it is also associated with unsecured loans. Some examples of unsecured term loans are consolidation loans to pay off credit card debt and signature loans.