definition of unsecured loans

definition of unsecured loans

Definition of “unsecured loan” - English Dictionary

“unsecured loan” in Business English

a loan for which the lender has no right to the property or other assets of the borrower if the money is not paid back:

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From Wikipedia, the free encyclopedia

Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (February 2009)

An unsecured loan is a loan that is not backed by collateral. Also known as a signature loan or personal loan.

Unsecured loans are based solely upon the borrower's credit rating. As a result, they are often much more difficult to get than a secured loan, which also factors in the borrower's income. An unsecured loan is considered much cheaper and carries less risk to the borrower. [citation needed] However, when an unsecured loan is granted, it does not necessarily have to be based on a credit score. For example, if your friend lends you money without any collateral, meaning something of worth that can be repossessed if the loan isn't repaid, then your credit score has zero to do with it, but rather the value of your friendship is at stake. Therefore the real meaning of an unsecured loan is that it is not backed by any object of value and is lent to you based on your good name. For financial institutional purposes, they may want to look at your credit score because they are not your friend and it is strictly a business transaction, therefore your good name may be associated with your historical payment history on prior debt, reflecting in your credit score.

There are three types of unsecured loans.

  • First there is a personal unsecured loan, meaning a loan that you individually are responsible for the repayment of.
  • Second is an unsecured business loan which leaves the business responsible for the repayment.
  • Finally there is an unsecured business loan with a personal guarantee. With the latter, although the borrower is the business, you as an individual will be the payer of last resort if the business defaults on the loan. [citation needed]

Since unsecured loans are not secured against property or any asset, it is more difficult for a lender to get their money back if the borrower does not or cannot repay the loan.

Because of this increased 'risk' (compared to secured loans) unsecured lenders tend to have stricter underwriting rules. In particular, lenders will look at the potential borrower's credit history and how they have conducted their previous and current credit or loan accounts.

In summary the lender has to decide, based on their borrower's credit history, how likely are they to repay the loan. If the risk is too high, the borrower will be declined for the loan. If the risk is acceptable, then the lender will (subject to other minimum requirements) make a loan offer. [citation needed]

Assuming a loan offer is made, the actual APR will normally depend on two things, the loan amount and that level of risk. Generally speaking, the higher the loan amount the lower the APR will be. In terms of the level of risk, the higher the risk the higher the APR lenders will charge - this is known in the loan industry as rate-for-risk. [citation needed]

Examples of Unsecured Loan in a sentence

Definition of Unsecured Loan in Agreement

Unsecured Loan means a senior unsecured loan obligation of any corporation, partnership or trust which is not (and by its terms is not permitted to become) subordinate in right of payment to any other debt for borrowed money incurred by the Obligor under such loan (other than with respect to trade claims, capitalized leases or similar obligations).

Definition of Unsecured Loan in Amended and Restated

Unsecured Loan means any loan that is (a) not secured by a pledge of collateral and (b) senior or pari passu in right of payment to any other unsecured indebtedness of the related Obligor.

Definition of Unsecured Loan in Credit Agreement

Unsecured Loan means a loan other than Senior Secured Loan or Second Lien Loan that is an extension of credit that provides for the amortization of principal or the payment of a fixed principal amount in full at maturity and a fixed term extended to an Underlying Obligor by a financial institution (including the Collateral Manager) and that also (i) does not constitute, or is not secured by margin stock; (ii) is acquired by the Issuer by way of assignment; and (iii) by its terms is permitted to be assigned, participated or otherwise transferred to the Issuer.

An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral. Because unsecured loans, sometimes referred to as signature loans or personal loans, are obtained without the use of property as collateral, the terms of such loans, including approval and receipt, are most often contingent on the borrower's credit score. Borrowers must generally have high credit ratings to be approved for certain unsecured loans.

An unsecured loan stands in direct contrast to a secured loan, in which a borrower pledges some type of asset as collateral for the loan, in turn increasing the lender's "security" for providing the loan. Unsecured loans are bigger risks for lenders, and as a result, they typically have higher interest rates and require higher credit scores than secured loans such as mortgages or car loans. In some instances, lenders will allow loan applicants with insufficient credit to provide a cosigner, who can take on the legal obligation to fulfill a debt should the borrower default.

What Are Examples of Unsecured Loans?

Unsecured loans include credit cards, student loans and personal loans, all of which can be revolving or term loans. A revolving loan is a loan that has a credit limit that can be spent, repaid and spent again. Examples of revolving unsecured loans include credit cards and personal lines of credit.

Term loans, in contrast, are loans that the borrower repays in equal installments until the loan is paid off at the end of its term. While these types of loans are often affiliated with secured loans such as mortgages and car loans, there are also unsecured term loans. A consolidation loan to pay off credit cards or a signature loan from a bank would be considered unsecured term loans.

There's ample data to suggest that the modernizing unsecured loan market is growing. In a November 2017 consumer credit report, TransUnion estimated that credit card balances in the United States had risen 7% in the third quarter of 2017 to $731 billion while personal loan balances reached an all-time of $112 billion. The past decade has seen the rise of peer-to-peer lending via online and mobile lenders coinciding with a sharp increase in unsecured loans. In another report, TransUnion found that "fintechs," or financial technology firms, accounted for 32% of personal loan balances through the first half of 2017, up from just 4% in 2012.

Alternative Lenders and Unsecured Loans

Alternative lenders, such as payday lenders or companies who offer merchant cash advances, do not offer secured loans in the traditional sense of the phrase. Their loans are not secured by tangible collateral as mortgages and car loans are. However, these lenders take other measures to secure repayment.

In particular, payday lenders have borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. Many online merchant cash advance lenders require the borrower to pay a certain percentage of online sales through a payment processing service such as PayPal. As a result, these loans are considered unsecured; although they are partially secured.

Defaulting on an Unsecured Loan

If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup his losses. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim property. However, the lender can take other actions, such as commissioning a collection agency to collect the debt or taking the borrower to court. If the court rules in the lender's favor, the borrower's wages may be garnished, a lien may be placed on the borrower's home, or the borrower may be otherwise ordered to pay the debt.

Difference Between Secured Loan and Unsecured Loan

Loan is referred to a sum of money borrowed from bank or financial institution for a particular period, that requires repayment along with interest. These days, loans are considered as the best means of availing finance for any purpose like education, construction of a house, purchasing the car or any other business requirement. There are two types of loan, namely, secured loan and unsecured loan. When a loan is secured the borrower pledges some asset as security against the loan.

On the other hand, an unsecured loan is one that is backed with the borrower’s creditworthiness and paying capacity. these are issued to promorters, so as to fulfill promorter’s contribution norm. In this article, we have compiled all the necessary differences between secured loan and unsecured loans. It can help you to decide, that which loan is best suited as per your needs.

Content: Secured Loan Vs Unsecured Loan

A type of loan in which the borrower pledges an asset as security against the loan amount, it is known as a Secured Loan. In the case of default in repayment, the lender has the right to seize and sell the security to recover the amount lent. Here one thing should be kept in mind that the borrower need not transfer the asset for getting the loan amount approved instead he can possess the property until and unless he fails to pay the loan amount. In the event of failure to repay the loan, the asset is forfeited by the lending institution.

Under secured loan, the amount of debt sanctioned by the lending institution will be based on the collateral. Interest rates are low as the loan is protected by the property. The types of Secured Loans are:

The loan agreement, in which an asset does not protect the loan amount is Unsecured Loan. In this type of loan, there is no obligation of the borrower to pledge an asset as security. The loan is known as unsecured because there is no guarantee regarding payment and if the borrower defaults payment the financial institution can only sue him for the money but cannot recover the amount forcefully or by selling his property.

The risk is very high as the property does not support the amount. The loan amount will be approved on the basis of creditworthiness, financial status, character and ability to pay, of the borrower. This also becomes one of the criteria for deciding the rate of interest. For availing such loans, the borrower must possess high credit ratings.

In the case of bankruptcy of the borrower, the unsecured creditors have the right to realise the amount out of his assets. But first of all the secured creditors are given the asset collateral, after that the unsecured creditors are paid off, on a proportionate basis. One good example of such loan is a credit card.

Key Differences Between Secured Loans and Unsecured Loans

The following are the major differences between a secured loan and unsecured loan

  1. The type of loan in which collateral supports the loan amount is known as a Secured Loan. Unsecured Loan, on the other hand, is those in which there is no asset is held as collateral.

Secured loans are sanctioned on the basis of collateral, but creditworthiness is checked for approving unsecured loans.

  • In secured loans, the asset is pledged whereas there in no pledging of assets in case of unsecured loans.
  • The risk of loss is very low in the secured loan in comparison to an unsecured loan.
  • The Secured loan is given for long term while the Unsecured loan is for short periods.
  • The interest rate is low in the Secured loan due to the presence of collateral. Conversely, the interest rate is comparatively high in the Unsecured loan.
  • The borrowing limit is high in the secured loan which is comparatively low in case of an unsecured loan.
  • In the case of default by the debtor, the creditor has the right to seize and sell the asset hypothecated in Secured Loan. In contrast to, Unsecured Loan, the creditor can file a suit against him and claim the money.
  • Secured Loan and Unsecured Loan, both are good at their places. In a secured loan, there is a guarantee, which if the borrower defaults payment the lender can recover the amount by selling the asset that is why the term is long. Apart from that, the borrower has to pay the money within the stipulated time. Otherwise, the lender will exercise a lien over the asset. In the case of an unsecured loan, the risk is very high that is why the complete credit history is checked as well as the loan is given only to those who are having high credit scores. The loan is usually allowed for a short period, but they carry high-interest rates.

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