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An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan. Thus, if the borrower fails to repay the loan, the bank’s only recourse is to sue the borrower in court and secure a judgment against him.  With this judgment, the bank will be able to garnish the borrower’s future wages, if any.  However, if the borrower fails to pay the loan and declares bankruptcy, the bank will be one of the last creditors in line to receive proceeds from the bankruptcy.  Because of this, an unsecured loan is considered to be very risky.  As a result, most unsecured loans carry a high interest rate. 

Credit cards are an example of an unsecured loan.  The interest rates on the outstanding credit card balances are higher than other traditional loans, such as home mortgages.  In addition, credit card issuers place a credit limit on the amount that can be charged (and thus borrowed) on the credit card. 

Individual who do obtain unsecured loans typically have a high net worth.  Terms of these types of unsecured loans vary.  They may be for a fixed term at a fixed interest rate. Alternatively, they may be a revolving line of credit with a rate that varies based on a published benchmark rate like the prime rate published in the Wall Street Journal or the London Interbank Offered Rate.

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