An unsecured loan is a loan that is not ‘secured’ by personal assets such as a car or home. In contrast, a secured loan is a loan that is obtained against assets which can be taken by the lender in the event of default. An unsecured loan is made based on the bank or financial institution’s assessment of the borrower’s ability to pay back the loan. If a potential borrower does not have valuable property or assets that can be used as security, an unsecured loan can be an important resource.
Because an unsecured loan requires no security (car, house, etc.), a key benefit is that there is no need for an evaluation, creating a faster loan process. Unsecured loan approvals can be fast and can often be completed in a matter of hours.
In general, unsecured loans are for smaller amounts than secured loans and may carry a higher interest rate. Unsecured installment loans are the most common type of unsecured loan. This is a type of loan where a borrower receives money from a bank or financial institution and then repays the loan over a set period of time. This type of loan can be helpful to a borrower who only needs money for a short amount of time – generally over the course of 5 years or less. It may also help a borrower rebuild their credit by making timely payments.
Unsecured loans can be used to help build credit. When an unsecured loan is an installment loan, it can help create a history of repayment with timely payments. Lenders may report a borrower’s payment history to credit reporting agencies, which may help improve a credit score if the borrower makes timely payments.