The loan industry has a number of terms used to describe different things that can sometimes sound a bit tricky. For example, we have a whole dictionary here on the site with different terms that may need to be explained. One of these that is so important that it gets its own article is unsecured loans.
The most important word here is security and it can sound strange to borrow money without having any security. But that is not true, as collateral is only to do with how the loan is designed, not something about the finances of the borrower.
What is security?
To describe what is without security, it becomes easiest to explain what security is. When it comes to loans, you can say that collateral is the same as a mortgage for the loan. This means that you are borrowing something and the lender has something like collateral which means that they know with pretty great assurance that they will get their money back in some way.
The most common form of loan where there is collateral is a home loan. The property purchased will then be used as collateral for the loan. Should a borrower not repay his money, the lender will take out his mortgage as payment for the loan. This means that it is very likely that the property will be sold to receive the money needed for the loan to disappear.
The fact that there is something that can act as collateral for a loan makes it safer for a lender to lend money, which means that loans of this type normally have a lower interest rate.
This means that a loan without collateral is thus a loan where you do not offer anything in pledge.
Micro loans / Private loans
It is really these two types of loans that you will come across that are unsecured loans. Although one usually makes a breakdown of these two loan types, they are basically the same if you ignore size and maturity. Private loans are also often referred to as interlibrary loans which can also be used as a description for micro loans or SMS loans which they are also popularly called.
Both of these types of loans are therefore unsecured loans, which means that you as a borrower can be subject to quite stringent requirements in order to be approved. The lender takes a greater risk and they often want a greater margin in their claims. Micro loans that are smaller often have slightly lower requirements and here it can actually suffice with a low income if only a few thousand USD is to be borrowed.
If it is instead a private loan, you should expect to have an income of at least USD 10,000 per month in order to potentially be approved.
As we wrote earlier, as a borrower, one can expect that the interest rate will be higher on a loan of this kind. But otherwise it is not the question of any strange loans even though it sounds a little worrying to borrow without collateral.