An unsecured loan is a loan obtained without collateral. A person obtaining an unsecured loan agrees to pay back the loan within a set term and signs documents attesting to such. This type of loan can also be called a signature loan.

The simplest unsecured loan is a personal loan from a friend or family member, with an I.O.U. as signature of agreement to pay back the loan. This type of unsecured loan should be well considered whether one is the lender or borrower. Large amounts that remain unpaid can be detrimental to relationships with family or friends. Either the lender or borrower may be dissatisfied with the rate at which the loan is being paid, and there is little recourse but small claims court if the loan remains unpaid.

Another common type of unsecured loan is a purchase made on a credit card. Each time a person makes a credit card purchase, he or she signs a form which authorizes the payment and stands as an agreement to pay the money borrowed. When the person has obtained the credit card, the terms and size of the loan are predetermined.

Use of the card represents agreement to any terms the credit card company may set. The money is not loaned on the basis of collateral, such as home or property ownership. The credit card company merely has the borrower’s agreement to pay any funds borrowed. If the loan is not paid in appropriate time, additional fees may be assessed, the account may be sent to collections, and legal proceedings can be taken against the borrower.

Should the borrower be unable to pay back the loan because of a significant reduction in financial well being, claiming bankruptcy may stop collection. The credit card company cannot, in most cases, demand that the borrower sell any assets he or she owns to pay the loan once bankruptcy has been claimed. However, claiming bankruptcy can seriously damage credit ratings and make banks less willing to offer a person an unsecured loan in the future.

Banks also can offer an unsecured loan to a borrower. Usually, both banks and credit card companies assess the creditworthiness of the borrower before handing over cash without collateral. Those who have lower credit scores tend to have less luck obtaining an unsecured loan, and if they can get one, they may be assessed high interest rates, since the lender is taking more of a risk.

Usually, an unsecured loan is for a small amount, perhaps for a one time medical fee or a vacation. When one’s credit is good, shopping around for the best interest rates for an unsecured loan is advisable. Frequently, the best rates for an unsecured loan are offered through credit unions. If one has an existing account with the credit union, obtaining an unsecured loan should not be problematic.