In all simplicity, an unsecured loan is also known as a signature loan in which due to your credit rating, the lender feels as if all the collateral they need to issue the loan is your signature alone. What this means is that for those who may have higher than average credit ratings, when they need money for a purchase or any other project, they can go to a bank or other lending institution and sign for a loan without having to give anything to the lender in its place.



A person who has worked hard to develop a good credit rating is not likely to run the risk of destroying all that they have worked for by failing to repay the loan. In some cases, depending on how high the person's credit rating is, the only thing the lender may need is the credit rating and not one single proof of any type of income to repay the loan.

This type of unsecured loan can be seen in many places today. If you have a credit card and you decide to make a purchase with the card, then this is an unsecured loan. The owner of the card has decided that they will pay for the purchase up front and do not require any form of collateral. All that they ask is that you repay the loan.

Many people assume that because you have not given them any collateral that a car loan is also considered to be an unsecured loan. This however is a false belief due to the fact that if you do neglect to pay on the car loan, they will reposes it; or at least make every attempt to do so.

When an unsecured loan is taken out, it is done so on ?good faith?. Any type of loan in which the lender cannot claim something in response to a failure to pay is an unsecured loan. If the lender can reposes the car or the home or whatever else the loan was for, then it is technically a secured loan. The collateral for these loans can either be given up front, such as you taking out a mortgage on your home which you already own in full, or it can be given after the loan is made as in the usual home loan where you sign over the deed to the lender after the completion of the sale.