Unsecured Loan
An unsecured loan is a loan that doesn't require collateral. The lender approves you based on creditworthiness — credit score, income, debt-to-income ratio, employment history — rather than an asset they can claim if you default. Most personal loans, credit cards, and student loans are unsecured. APRs are typically higher than secured loans because the lender has no asset to recover.
Unsecured loans rely entirely on the lender’s confidence in your ability to repay. There’s no fallback asset; if you default, the lender pursues collection through credit reporting, debt sale, and potentially litigation.
Common unsecured loan types
- Personal loans: most online and bank-issued personal loans are unsecured
- Credit cards: essentially short-term unsecured credit
- Student loans: federal and most private student loans are unsecured (your degree isn’t collateral)
- Signature loans: a specific term for small unsecured personal loans, often from credit unions
Why APRs are higher
Without collateral, the lender’s only recourse if you default is collection. Recovery rates on defaulted unsecured loans are low: typically 4-15% of face value when sold to debt buyers. Lenders price this in by charging higher rates upfront.
For prime borrowers, the gap between unsecured and secured rates is small (a personal loan might be 12% APR while a HELOC is 8%). For subprime borrowers, the gap widens dramatically: subprime unsecured loans can run 100-200% APR while secured alternatives are still in the 30-50% range.
When to choose unsecured
If you don’t want to put an asset at risk, unsecured is the way to go. The trade-off is paying a higher rate. For amounts under $5,000 and terms under two years, the rate difference often doesn’t translate to enough dollar cost to justify the risk of losing collateral.