What is an example of an unsecured loan?

An unsecured loan is a type of loan that is not backed by collateral, meaning that the lender does not have a claim on any specific asset if the borrower fails to repay the loan. An example of this is an unsecured credit card, which allows individuals to borrow money up to a certain limit based solely on their creditworthiness and promise to repay, rather than through any collateral. This means that while the borrower is responsible for making payments, there is no specific asset at risk, which is a characteristic feature of unsecured loans.

In contrast, options such as a home mortgage, auto loan, and home equity line of credit are secured loans. They are backed by specific assets: the home for a mortgage, and the vehicle for an auto loan. In such cases, if the borrower defaults on the loan, the lender has the right to seize the asset to recover the debt. This fundamental difference between unsecured and secured loans is crucial in understanding their risk profiles and the implications for both lenders and borrowers.