What Is an Unsecured Loan?

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 12, 2023

Unsecured Loan Definition

An Unsecured Loan is a loan that is issued and backed by a borrower's credit worthiness rather than collateral, such as a car or house.

The terms of the loan are therefore contingent on the borrower and his/her credit score, rather than the value of their collateral.

Because unsecured loans aren't secured by assets, they are riskier for lenders, and so they typically carry higher interest rates and require high credit scores.

Likewise, if the borrower defaults on their loan, the lender may have the grounds to bring them to court or send a collection agency to retrieve the debt.

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Types of Unsecured Loans

There are two main types of unsecured loans:

1.) Revolving Loan

A revolving loan is a loan that has a credit limit.

The borrower can spend up to that limit, and then must reduce a portion of the debt to below the set credit limit in order to borrow again.

Credit cards are a common example of a revolving loan.

2.) Term Loan

A term loan is a loan that a borrower pays in regular installments until the full balance is paid off.

This is one of the most common loan structures, whether secured or unsecured.

This type of loan is considered non-revolving because once the principal is paid back, the terms of the loan have ended.

Consolidation Loans

On rare occasions, an individual may be able to take out a consolidation loan, or a loan to pay off existing loans and debts.

This type of loan will often be unsecured.

Unsecured Loan FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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