An unsecured loan is a loan that is given to a borrower without the borrower having to offer collateral in exchange. In unsecured loans, the borrower's creditworthiness and reputation are what earns the borrower the right to receive the loan, instead of collateral.
Unsecured loans are also known as signature loans, good faith loans and character loans.
Unsecured loans are an alternative to secured loans. In a secured loan, a borrower must offer collateral as a security to the borrower in case he or she fails to repay the loan. If the borrower fails to pay the loan, then the lender keeps the collateral.
However, with secured loans, no such collateral is offered because the chance that the borrower will default is viewed as being incredibly small. Successful businesses, for example, can get unsecured loans; but an individual who has bad credit may have a tough time getting an unsecured loan