What Are Unsecured Loans?

There are many types of loans in the finance world and they can be either a secured or unsecured loan. But what does it mean when a loan is unsecured or secured?  

Whether a loan is secure or not has to do with whether it requires a form of collateral from the borrower or not. All loans come with requirements and qualifications to be approved. For some loans, a form of collateral is required, like a car. For other loans, information like income and credit scores is enough to secure the loan funding.  

Learn more about the difference between secured vs unsecured loans, how they work, and some examples of unsecured loans that might work for you. Check City loans can also provide the financial help you need, when you really need it.  

What is an Unsecured Loan?

An unsecured loan is a type of loan that is backed by the borrower's creditworthiness and ability to repay. Applicants are approved or denied for this type of loan based on information about their creditworthiness and ability to repay, and not by an asset.  

Lender's reviewing an application for an unsecured loan will look at information like if the borrower has excellent credit or at least good credit, credit history, income, debt to income ratio, etc. Because there is no collateral to secure the loan's funds in case the borrower doesn't repay the loan, unsecure loans may be harder to get approved. Charging higher interest rates is sometimes another way lender's counteract the higher risk unsecure loans have.  

What is a Secured Loan?

A secured loan is a type of loan that is backed by the borrower's collateral or assets. Loan applicants are approved or denied for this type of loan based on the collateral or assets that a borrower pledges to secure the loan funding.  

Lender's reviewing an application for a secured loan will look at information about the collateral or asset, like it's current condition and market value. Because there is a form of collateral to secure the loan's funds in case the borrower doesn't repay, secure loans may be easier to get approved even if you have bad credit. Lenders may sometimes offer lower interest rates on secured loans because they are backed by collateral in case of loan default.

Secured loans can also be considered a type of recourse loan because the lender "has recourse" in that they have the right to seize the collateral tied to the loan if the borrower fails to repay the loan. They can also be referred to as a collateral loan, because there is some kind of collateral tied to the loan agreement.  

Secured vs Unsecured Loans

The main differences between secured vs unsecured loans are that secured loans have collateral and unsecured loans do not have collateral. Creditworthiness matters more for unsecured loans than it potentially does for secured loans.  

Types of Unsecured Loans

There are several different types of unsecured loans. Unsecured loans can include examples like personal loans, installment loans, payday loans, home improvement loans, and more. Any loan that doesn't involve a form of collateral is a type of unsecured loan. Meanwhile, secured loans can include examples like title loans, auto loans, or mortgages.  

How Unsecured Personal Loans Work

An unsecured personal loan is a type of loan that can be used for various personal expenses and is usually based on creditworthiness and income. Personal loans are a type of unsecured loan, so that means that generally, personal loans don't require collateral to approve the loan.  

Step 1: Fill out an application for an unsecured personal loan.

Step 2: Provide information about your income and creditworthiness.

Step 3: If approved, get the funds you need without needing collateral to secure the loan.

How Unsecured Installment Loans Work

An unsecured installment loan is a type of loan that breaks payments into smaller chunks paid back in regular intervals known as installments. Installment loans are a type of unsecured loan, meaning it doesn't generally require a form of collateral.  

Step 1: Fill out an application for an unsecured installment loan.

Step 2: Provide information about your income and creditworthiness.

Step 3: If approved, get the funds you need without needing collateral to secure the loan.