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.

RELATED TERMS
  1. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  2. Loan

    The act of giving money, property or other material goods to ...
  3. Closed-End Credit

    A loan or extension of credit in which the proceeds are dispersed ...
  4. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of ...
  5. Renegotiated Loan

    The result of an agreement between a borrower and a lender to ...
  6. Signature Loan

    A type of personal loan offered by banks and other finance companies ...
Related Articles
  1. Investing

    What is an Unsecured Loan?

    An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan.
  2. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  3. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  4. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  5. Personal Finance

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  6. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  7. Tech

    Good Credit? Try This Credit Card Alternative

    Personal loans are a credit card alternative to try if you've got great credit and you want to lock in a lower interest rate on what you borrow. [underlined word is credit card alternative]
  8. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  9. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  10. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
RELATED FAQS
  1. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ... Read Answer >>
  2. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
  3. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
  4. What is the difference between the Five Cs of Credit and credit rating?

    Learn the difference between the five C's of credit and credit rating and how they are used together by banks and finance ... Read Answer >>
  5. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
Trading Center