We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is an Unsecured Personal Loan?

By Phil Shepley
Updated May 17, 2024
Our promise to you
WiseGEEK is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGEEK, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

An unsecured personal loan, also referred to as a signature loan, occurs when an individual borrows money without backing the loan with collateral. The money loaned is intended for personal use, rather than business expenses. It is granted to the borrower mainly depending on his or her integrity and ability to pay the loan back over the agreed term. The counterpart to an unsecured personal loan is a secured loan, or a loan that is backed by some kind of asset.

In a secured loan, the person who borrows the money will do so while pledging a certain piece of property, the asset, to the lender as collateral. If the borrower defaults on the loan and breaks the loan agreement, the lender will then be allowed to claim this property. For example, if a vehicle is used as collateral for a secured personal auto loan, the lender will typically repossess that vehicle if the borrower ceases to follow the terms of the lending agreement. If a home is used as collateral, it may be foreclosed upon by banks after a person can no longer make their house payments every month. In the case of an unsecured loan, the bank has no such avenue if the borrower cannot pay.

Generally, an unsecured personal loan is a greater risk to a lender since there are no assets to procure should the borrower default. This is where the borrower's credit rating applies; the lender can use the rating to gauge the risk that someone may default on a loan. Those with stellar credit records and a high credit score will most likely be able to take out an unsecured personal loan from a financial institution.

Another factor banks consider is the annual percentage rate (APR) of the loan, which is the value of the interest that will be paid by the borrower to the lender. Someone taking out an unsecured personal loan who also has bad credit will most typically end up paying much more in interest. Conversely, a good credit score can lead to lower APRs for borrowers, increasing the importance of maintaining a good credit history.

Banks, credit unions, and companies in the business of lending money are not the only sources of unsecured personal loans. One can also borrow money from a friend, relative, or acquaintance. When this is the case, the relationship between the lender and the borrower, as well as the reputation of the borrower, can be at stake. When making an agreement for an unsecured loan from a friend or family member, the borrower must carefully consider the consequences should a problem arise in repaying the loan.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

By anon72683 — On Mar 24, 2010

I got an unsecured loan from a reputable bank but am unable to pay back in full. what is my fate with the bank?

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.