Unsecured Loan Agreement Definition

Unsecured Loan Agreement Definition: What You Need to Know

When it comes to borrowing money, there are two types of loans that you might consider: secured loans and unsecured loans. Secured loans are those that require collateral, such as a home or car, to back up the loan. Unsecured loans, on the other hand, do not require collateral, and are therefore considered a higher risk for lenders.

An unsecured loan agreement is a legal document that outlines the terms and conditions of an unsecured loan. This type of loan is often used for personal or business purposes, and can be obtained from a variety of sources, including banks, credit unions, and online lenders.

The terms of an unsecured loan agreement will vary depending on the lender and the borrower`s creditworthiness. However, there are a few key elements that are typically included in any unsecured loan agreement.

Loan Amount and Interest Rate

The loan amount is the amount of money that the borrower is borrowing from the lender. The interest rate is the percentage of the loan amount that the borrower will pay back to the lender as interest. The interest rate for an unsecured loan is typically higher than that of a secured loan, due to the higher risk involved.

Repayment Terms

The repayment terms of an unsecured loan agreement will dictate how the borrower will repay the loan over time. This typically includes the amount of each payment, the frequency of payments, and the total length of the repayment period.

Late Payment Fees and Penalties

If the borrower fails to make a payment on time, the unsecured loan agreement may include late payment fees or penalties. These fees can add up quickly, so it`s important for borrowers to make their payments on time to avoid additional charges.

Prepayment Penalties

Some unsecured loan agreements may also include prepayment penalties, which are fees that the borrower must pay if they pay off the loan early. These fees are meant to compensate the lender for the lost interest that they would have earned if the borrower had continued to make payments.

Default and Collection Procedures

If the borrower fails to make their payments at all, the unsecured loan agreement will typically outline the procedures for default and collection. This may include legal action taken by the lender to recover the loan amount and interest owed.


An unsecured loan agreement is a legal document that outlines the terms and conditions of an unsecured loan. As a borrower, it`s important to read and understand the terms of the loan agreement before signing on the dotted line. This will help avoid any misunderstandings or surprises down the road, and ensure that both the borrower and the lender are on the same page. So, it is recommended to do thorough research before considering an unsecured loan.