What is an unsecured loan?

An unsecured loan is fundamentally defined as a loan that does not require any collateral or security. This means that the lender provides the loan based solely on the borrower's creditworthiness and ability to repay, rather than on any asset that can be seized if the borrower defaults. Since there is no collateral backing the loan, lenders typically assess the borrower's credit history, income, and overall financial situation before approving the loan and determining the interest rate.

This aspect of unsecured loans often results in higher interest rates compared to secured loans because the lender is taking on a greater risk. If a borrower defaults on an unsecured loan, the lender has limited recourse to recover the funds, making thorough assessment of the borrower's financial profile crucial during the lending process.