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Unsecured loan


A loan where the creditor has no claim on any particular asset of the debtor in the event of default. This is contrasted with a secured loan, where the lender has a right to take over some particular asset if repayments are not made at the due dates. In the event of the borrower going bankrupt or becoming insolvent, unsecured creditors normally rank below secured creditors for any available assets. Unsecured loans are thus riskier than secured loans, and require higher interest rates to compensate the lenders for this.

Reference: Oxford Press Dictonary of Economics, 5th edt.