Unsecured personal loan

Definition

An unsecured personal loan is a type of loan that does not require collateral, meaning the borrower is not required to pledge assets to secure the loan. Approval and interest rates are based on the borrower's creditworthiness and financial history.

5 Must Know Facts For Your Next Test

1. Interest rates for unsecured personal loans are typically higher than those for secured loans due to increased risk for lenders.
2. Monthly payments on an unsecured personal loan can be calculated using standard amortization formulas.
3. Lenders assess factors such as credit score, income, and debt-to-income ratio when approving unsecured personal loans.
4. Unsecured personal loans have fixed payment schedules, where each installment covers both principal and interest.
5. Failure to repay an unsecured personal loan can severely impact the borrower's credit score, but does not result in asset seizure.

Review Questions

• Why do unsecured personal loans generally have higher interest rates compared to secured loans?
• What factors do lenders consider when approving an application for an unsecured personal loan?
• How are monthly payments structured for an unsecured personal loan?

Related terms

Loan Amortization: The process of paying off a debt over time through regular payments of principal and interest.

Secured Loan: A loan backed by collateral that the lender can seize if the borrower defaults.

Credit Score: A numerical representation of a person's creditworthiness based on their credit history.