What is an Unsecured Loan?
Tricia Christensen
Tricia Christensen
An unsecured loan is money lent from one party to another without any collateral to secure its repayment. In most cases, these types of loans are considered somewhat high-risk, since the lender does not usually have any way of forcing the borrower to comply with the terms or make payments on time short of legal action. For this reason, most unsecured loans carry relatively high interest rates and are often only available to those with strong credit scores.
Reasons for Pursing an Unsecured Loan
Unsecured loans are used primarily for small, short-term expenses, such as medical crises or wedding or funeral costs. They are usually intended to be paid back within about a year, though the terms can vary depending on the amount at issue and the relationship between the lender and the borrower. When borrowers do not have a lot of valuable property, pursuing an unsecured loan may be one of their only ways of getting access to needed funds.
Simplicity is another reason to seek an unsecured loan. When only small amounts of money are at issue, it is not usually worth the hassle of transferring property titles and establishing a collateral relationship. A simple contract can often be the best way to proceed, even if there are other trade-offs.
Bank Loans
Bank customers often apply for unsecured loans as a means of getting fast access to cash. Unlike home loans or car loans, which are normally secured by the house or automobile itself, unsecured loans are simply given on the borrower’s word to repay. There are always contracts to sign and papers to process, but there is nothing the bank can seize if the borrower fails to repay the money lent. This type of unsecured loan may also be called a “signature loan.”
Banks will not usually extend unsecured loans to just anyone. A customer must usually have a stable income, as well as a history of on-time payments and trustworthiness, in order to be considered.
Unsecured Personal Loans
Most of the loans that happen between family and friends are unsecured. These types of loans are often very informal, and may not be documented in writing. Parties usually come to an agreement about when and how the money will be repaid, but this is often unenforceable.
Credit Card Transactions
Purchases made with credit cards are usually structured as unsecured loans. Credit card companies extend a certain line of credit, secured only by the customer’s agreement to pay purchases back. Failure to make payments usually incurs fees and high interest rates, but not property seizure. When property is seized, it is as the result of a court order — usually issued to remedy chronic repayment failure — not because the property is collateral.
Interest Considerations
High interest rates are one of the characteristic features of almost all unsecured loans. By charging higher-than-normal rates, lenders are able to protect themselves against the risk of default. Most of the time, banks offer more competitive interest rates than credit card companies, but not always. Borrowers are usually wise to carefully investigate all options and terms before committing to any specific loan.
Tax Consequences
At least in the United States, individuals who hold secured loans — such as home loans, where the house serves as collateral — can often deduct any interest charged from their income tax returns. This almost never applies to interest in an unsecured arrangement.
Tricia Christensen
Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.
Tricia Christensen
Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.
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![Unsecured loans may be used to pay for funeral expenses.]()
By: tomaspicUnsecured loans may be used to pay for funeral expenses. -
![Credit cards are a commonly used form of unsecured loan.]()
By: bramginoCredit cards are a commonly used form of unsecured loan. -
![Personal loans are issued solely on an applicant's promise to repay the debt with no form of collateral.]()
By: vickyPersonal loans are issued solely on an applicant's promise to repay the debt with no form of collateral. -
![Cash loans made between family and friends are a form of unsecured debt.]()
By: Eric LimonCash loans made between family and friends are a form of unsecured debt.
Discussion Comments
I have $127,000 in credit card debt, a good credit score (735) and a $160,000 mortgage. Everything is current. What are my options for getting better rates on credit cards to get them paid down?
Very informative article. I agree that the higher interest rates are a drawback. But you can mitigate that risk by forcing lenders to compete for your business. The competition will lead to better rates.
We have an unsecured business loan. If we had to close the business down, could the bank seize our house?
Vmarie, there are organizations that deliver cash loans even to the people with bad credit history (unlike popular banks). In order to obtain such loans, an applicant has to be a US citizen of legal age, legally employed, and with a valid banking account. The interest charges there are not very high. You may recommend this option to your husband’s daughter.
Article helps. Similar sources are toll-free hotline phone numbers.
If the loan is not paid in an appropriate time, additional fees may be assessed, the account may be sent to collections, and legal proceedings can be taken against the borrower. --Steven
Thanks for this article, I found it really useful. I'm looking for a loan at the moment.There are websites where they have all the different loans available in one list so you can compare them. Thanks again.
This cleared up a lot of negative thoughts I had about unsecured loans.
I have a friend who's dad recently died. He's the trustee. There's not a lot of money available and what there is, is needed for the care of his mom. There's an outstanding amount due to a credit card debt. What happens if they don't pay?
Any suggestions. My friends got their first mortgage and I believe the second loans were what they call "short sale".
The difference what was owed and received was a substantial amount which was put in a non-secured loan.
He wants to do the right thing and pay it back, but when his account was transferred to a new company they are stating that his home insurance needs updating or they could put insurance on for him. He told them this is not a mortgage it is an unsecured line of credit.
No one understands that its a line of credit and property is no longer related to this account. Any suggestions would be helpful.
i have an unsecured loan of 100k in my business but business broken is a corporation and i have no resources to pay. please reply
I lost my job and have a credit card debt of $13,000.00 of which I cannot pay. I do not have any income with which to repay. What do you advise?
I have an unsecured loan with a company that has gone into liquidation. I have lost my job & cannot pay back the loan at the moment. I have explained this to them but they are still pursuing payment. My mother's house is in my name but doesn't have any equity in it. They are requesting they have a charge on the property. Can they do this?
Thank you
My husband's daughter owes us $5,000 from 4 years ago. We just recently pressed her for payback because of my husband's job situation. We told her to see about getting a loan to pay us back and when she gets her settlement from a car accident, she can pay that loan back. She told us today that no one will give her and her husband a loan. Are there places that will give loans out? She works and her husband works; they rent their house. Thanks!
What happens to the unsecured credit card loan when the owner of the loan dies? My husband died a year ago with a sizeable credit card bill. For the last year I have made all the payments on the bill in a timely manner. My financial situation has changed and I am no longer able to keep the payments current. Is there any relief available for situations of this nature?
Very helpful information - thank you!
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