This article discusses the basics of unsecured debt.
A loan or debt is considered to be a unsecured debt if there is no collateralized guarantee that allows the lender or creditor to have access to a asset if the borrower fails to honor the loan contract and agreement.
A financial security with no asset to back it up is unsecured.
Personal bank loans are considered unsecured debt because the only peace of mind the lender has is the borrowers promise to make timely payments as outlined in a loan agreement. Compare this to a boat loan that is secured by the actual boat being purchased. In this case if the borrower fails to pay back the loan they used to purchase the boat the lender can take the boat and sell it. The proceeds of the boat sale go to the lender to cover the losses from the bad loan.
Lenders charge borrowers more money for unsecured loans. The borrower will pay higher interest rates and fees for a loan that is not secured. The higher cost of unsecured loans is to cover the increased risk that the lender takes on by loaning the money. Though the borrower will have to pay more for the money borrowed through an unsecured loan they are not at risk of losing an asset if they default.
On the flip side borrowers can get lower interest rates if they agree to guarantee the repayment of the loan with a asset of equal or greater value.
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