Definition
The term unsecured loan is used to describe a loan that is not backed by property, or any other form of collateral. An unsecured loan is riskier to the lender because they do not have the ability to repossess, or foreclose on, a property.
Explanation
Also known as unsecured debt, the most common examples of unsecured loans are credit card debt and student loans. In this example, a loan may be composed of credit card charges or higher education expenses, which no longer have any tangible value. That is to say, they cannot be repossessed by the lending institution and sold to help repay the money owed.
An unsecured loan is one of the two overarching forms of consumer loans, the other being a secured loan, which is secured by collateral. The lack of collateral for an unsecured loan means the loan presents a higher risk of non-payment to the lender. This is one of the reasons the interest rate on an unsecured loan will be higher than a secured loan.
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