Unsecured Loan

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DEFINITION of 'Unsecured Loan'

A loan that is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral. An unsecured loan is one that is obtained without the use of property as collateral for the loan. Borrowers generally must have high credit ratings to be approved for an unsecured loan.

Also called signature loans and personal loans.

BREAKING DOWN 'Unsecured Loan'

Because an unsecured loan is not guaranteed by any type of property, these loans are bigger risks for lenders and, as such, typically have higher interest rates than secured loans (such as a mortgage). Although the interest rates are higher, the rates may still be lower than those of credit cards. Unlike mortgage loans, the interest on an unsecured loan is not tax deductible.

An unsecured loan may be a good option for individuals who do not have enough equity in their homes to be approved for a home equity loan. An unsecured loan may have a fixed interest rate and be due at the end of a specified term, or it can exist as a revolving line of credit with a variable interest rate.

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