DEFINITION of 'Character Loan'

A character loan is a type of unsecured loan that is made on the basis of the borrower's reputation and credit. Borrowers are typically able to obtain only small loans by this method, since if the borrower is unable to repay the loan, the bank will most likely encounter considerable difficulty in recovering the loaned funds. This is in contrast to secured or collateralized loans under which repayment of the loan is secured by a valuable piece of property or equipment.

BREAKING DOWN 'Character Loan'

A common example of a character loan is a credit card. Before obtaining a credit card, the issuer checks the borrower's credit report (i.e. character), and determines how likely the borrower is to repay the loan. The issuer then decides on how large of a credit line (i.e. loan) it will allow. Borrowers with poor credit or no credit may be unable to obtain a credit card, or may be extended only a very small credit line.

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