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What is an unsecured loan?

What Is an Unsecured Loan?

Updated on February 14, 2023


Webster’s Dictionary defines an unsecured loan as… Actually, let’s stop right there. You’ve seen these articles a thousand times and in a thousand different places and they all seem the same. Explanation of a term (usually relevant to the business for which the article was written) which always seems to begin with the dictionary definition, and then goes into some elaboration that essentially repeats the dictionary definition without repeating it.

You know what we mean.

It’s not that we don’t want to give you accurate information. In fact, that’s exactly what we’re about to do. It’s just that we’re pretty sure you’re smart enough to know the basic definition of lots of things and instead of filling up space with a cut and paste definition. (A writer’s best friend for meeting word count quotas). We want to get into some of the technicalities and nuances of what is and what isn’t an unsecured loan.

What Is an Unsecured Loan?

An unsecured loan is any loan that is not backed up by a tangible asset for collateral. Whenever you take out a loan without putting up – for instance – a car or house as collateral, then that loan is technically unsecured. It is the value of the tangible asset that provides security for the loan.

Now, when we say ‘security,' do we mean ‘secure’ as in ‘safe’ or is it more like the emotional kind of security? As a matter of fact, it’s a little of both. But we’ll go into what constitutes a secured loan in another article. For now, let’s just stick to the particulars of what an unsecured loan is.

It is important to differentiate the specifics of what makes an unsecured loan from aspects of credit that might seem the same but really aren’t. For instance, unpaid medical bills are considered unsecured credit, but not unsecured loans. This is because the money owed is for a service that has already been rendered (like the procedure your cousin had to remove that unsightly growth and now he’s not only safer from the threat of melanoma, but he can show his face in public. By the way, if this is true for your cousin, tell him we wish him a speedy recovery and best of luck in his social life). If that bill goes unpaid, then it becomes a line of unsecured credit that must be resolved either through repayment or bankruptcy.

That example is how a bill can become unsecured credit by default. This would apply in similar situations such as your auto mechanic agreeing to send you a bill for work done on your car and then the bill goes unpaid. That’s a form of unsecured credit that does not qualify as an unsecured loan.

The reasons it’s important to know the differences mostly have to do with the potential ramifications of the difference between secured and unsecured loans and lines of credit.

Let’s look at credit cards. Most credit cards are based on your credit score, income, and similar factors. If you apply for a credit card without using any collateral, that is considered both an unsecured line of credit and qualifies as an unsecured loan. The key differences in this situation are factors such as interest rates and borrowing limits. Secured lines of credit tend to have lower interest rates and higher lines of credit. The opposite is true for unsecured lines of credit, and unsecured loans.

Not Paying Your Unsecured Personal Loan

Perhaps the primary difference is the consequence of what happens when a line of credit goes unpaid. Unlike a secured loan, unsecured lines of credit which go into delinquency must be resolved through legal means such as getting a judgment rendered against the borrower through the court. Lenders cannot just come to your house and take whatever they feel is the equal value of the unpaid line of credit. But if a lender takes legal action, they can get a judgment against a borrower and then legally have certain assets seized such as checking accounts, property that does not constitute the primary residence of the borrower, stocks, even 401k accounts are subject to a judgment against unpaid lines of credit.

Sometimes it seems like lenders can be aggressive in pursuing judgments against borrowers who do not repay an unsecured loan. It’s best to remember that these things are not personal vendettas (even though it may feel like that). If a lender puts up finances for an unsecured loan, they are taking a risk based on the potential for repayment. Lenders cannot simply “write off” unpaid lines of credit because the records would indicate too many loans to high-risk borrowers and the lender’s credit rating would be lowered, and they’d likely go out of business.

Perhaps you may have heard of a few institutions going through this very thing in the last ten years or so (see the financial crash of 2008). As a result, standards for issuing unsecured loans have become much tougher, with most borrowers receiving lines of credit lower – and with higher interest rates – than they would have in, say, 2005.

But there are times when many of us just plain need money, even though we don’t have many assets to use as collateral, and our credit might not be so great. This is not an uncommon problem. More than half of American households could not write a check for $500 if the need arose.

So, if you find yourself in a position where you might need to utilize an unsecured line of credit, but your credit isn’t so stellar, then come to CASH 1 and inquire about unsecured personal or secured title loans. We work directly with you, based on your current income, to get you the cash you may need for any reason.

Photograph of author Joseph Priebe

Joseph Priebe

Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.

With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.

When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.