Unsecured loans or personal loans are loans that are issued based on the borrower's creditworthiness without requiring collateral or a security deposit. If the borrower defaults, there is no asset that can be seized to repay the loan.
Unsecured loans typically have higher interest rates than secured personal loans. Since the loan is not backed up with an asset, borrowers must possess high credit scores to qualify for unsecured loans. Credit scores are a reflection of the borrower's creditworthiness. Lenders typically determine credit score by evaluating the loan applicant's credit history and proof of income using a debt-to-income ratio formula.
In some cases, lenders will require borrowers with low credit scores to provide a consigner, who will bear the legal obligation to cover the debt if the borrower defaults on the loan.
There are three forms of unsecured loans: personal loans, student loans, and unsecured credit cards. Personal loans are often issued by banks, online lenders, or credit unions. Student loans are available from the Department of Education and various private sources. Credit cards are classified as unsecured loans because the user borrows money each time they make a charge and are also referred to as revolving credit.
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