An unsecured personal loan is a loan that is issued based solely on the borrower’s creditworthiness. It can be more difficult for a borrower to obtain an unsecured loan since it is viewed as riskier for the lender without collateral on the loan. People with higher credit scores usually have better chances of obtaining unsecured loans and also tend to get better terms.

Unsecured vs. Secured Loans

In contrast to an unsecured loan, a secured loan involves some form of collateral to serve as a guarantee or a form of insurance for the lender in the event of a default on the loan. Common types of secured loans include car loans and home loans. If a borrower defaults on a car loan, for instance, the car then becomes the property of the lender.

Unsecured loans do not involve that type of collateral. Types of unsecured loans include student loans, credit cards, and personal loans. Since an unsecured personal loan is based primarily on the borrower’s credit history, the higher a person’s credit score, the better the terms and interest rate tend to be. Higher interest rates for borrowers with lower credit scores can serve as a substitute for the lack of collateral associated with an unsecured loan.

Learn More

For more information about types of loans and for more financial terminology and resources, go to www.liftcredit.com. You can find a wide variety of resources to help you navigate the complex world of personal finance and loans. Knowing the details of each type of loan can help you find the right one for you and your needs.