In an unsecured loan, a lender provides money to a borrower without any legal claim to the borrower’s assets in case of default. This means the lender has to depend solely on the borrower’s financial capacity and creditworthiness for repayment.
This type of lending is usually only offered to privileged clients who have long-standing relationships–situations where the character, credit history and capacity of the borrower are well known. They are more often seen between friends and family members who have a long-standing relationship.
Because these loans are unsecured, interest rates are generally less favourable than for secured loans (loans for which lenders do have a claim to the borrower’s assets).