The loan or personal loan market is broadly divided into two segments: secured and unsecured loans. An unsecured loan is defined as a loan that is not linked to any underlying security or asset, such as a home or car.
For example, for a secured loan, a lender or financial institution will ask for an asset as collateral from the borrower, which it can repossess, if the loan goes into default. For an unsecured loan, this means that in the event of a default on the loan by the borrower, the lender will have no recourse to any assets. The only avenue open to them to try to recover their monies is to take the borrower to court. Unless you have an impeccable credit record, most lenders will not offer an unsecured loan to a borrower, since the risk of default may be too high for them.
The reason for a borrower to seek out an unsecured loan can be manifold. First-time borrowers or young borrowers simply may not have any assets that they can use as a security or collateral for a loan. Another reason may be that the borrower’s assets, such as a home or car, have already been used or pledged as a security for another loan. Or the borrower simply does not want to risk using his existing assets as security or collateral for a loan.
An unsecured loan for someone with a good credit standing should not be a problem to obtain. However, rates and terms for unsecured loans vary a great deal from lender to lender. Each lender will make their own assessment on the creditworthiness of an individual borrower.
However, the lowest rates may be obtained from an institution with which you have a history. For example, the financial institution you bank with may be willing to offer you an unsecured loan or most competitive rates, since they know your financial history. However, a bank that does not know you, may ask for a security or collateral for the same loan. As with any loan, it is important to shop around and compare prices and terms.