What is an unsecured loan is a type of debt that does not require collateral (like your home or savings account) to back the debt. Instead, lenders rely on the borrower’s creditworthiness and promise to repay the debt. These loans are usually offered by banks, credit unions and online personal loan lenders. Because of the increased risk, lenders typically have higher credit or eligibility requirements and interest rates for unsecured loans are generally higher than secured loans. If you fail to make payments on your unsecured loan, your lender can file a debt collection lawsuit against you and take legal action to seize your assets.

What is an Unsecured Loan and How Can It Help You

Because unsecured loans do not involve the pledge of collateral, these loans are usually easier to qualify for than secured loan options. In general, borrowers with excellent credit will be able to get an unsecured loan at lower rates and with shorter repayment terms than borrowers with fair or poor credit.

Unsecured personal loans are often used to cover large expenses, like medical bills, home improvements, or debt consolidation. However, the most important consideration when taking out an unsecured loan is to ensure that you will be able to repay the debt on time. Failing to make timely payments will damage your credit score and may prevent you from qualifying for other types of loans in the future. To avoid this, always compare unsecured loan offers from multiple lenders to find the best rate and loan terms for your needs.