An unsecured loan is one that does not require collateral. Rather than being backed by a physical asset, the loan is only backed by the borrower’s creditworthiness. Because banks are taking on higher risks with an unsecured loan, they charge higher interest rates. These higher interest rates help to offset some of the loan losses that the bank will inevitably experience.
To receive the best-unsecured loan interest rates, borrowers must have a high credit score. Those with lower credit scores can still receive an unsecured loan but may need a cosigner, who will be responsible for the loan if the primary borrower is unable to make payments. Examples of unsecured loans include credit cards, student loans, and personal loans.