unsecured loan
A loan not backed by collateral, relying solely on the borrower's creditworthiness. Higher risk for the lender means higher interest rates for the borrower.
Example
“Credit cards and student loans are common examples of unsecured loans — no collateral required, but higher rates.”
Memory Tip
UNSECURED = no security (collateral) backing it up. Higher risk, higher rate.
Why It Matters
Understanding unsecured loans helps you evaluate borrowing options and their true costs. Since these loans carry higher interest rates due to increased lender risk, knowing this term helps you make informed decisions about whether to borrow and from whom.
Common Misconception
Many people believe unsecured loans are easier to obtain than secured loans, but the reality is that lenders scrutinize your credit score and income much more carefully. A poor credit history can result in loan denial or rates so high that borrowing becomes impractical.
In Practice
If you apply for a personal unsecured loan with a credit score of 720, you might receive a 7 percent interest rate on a 10,000 dollar loan over five years, costing about 1,900 dollars in interest. However, someone with a 580 credit score for the same loan could face a 24 percent rate, adding nearly 6,600 dollars in interest charges instead.
Etymology
From Latin 'un-' (not) + 'securus' (safe). The lender is NOT secured by any collateral.
Common Misspellings
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