What characterizes a personal loan?

A personal loan is typically characterized as being unsecured, meaning that it is not backed by collateral. Instead, the approval and terms of the loan largely depend on the borrower's credit rating. This credit rating assesses the borrower's creditworthiness and ability to repay the loan. Lenders use this information to determine the interest rate and the amount they are willing to lend.

This is why the characteristics of personal loans are often linked to the borrower’s financial history and credit profile rather than their assets. Because the loan is unsecured, if the borrower defaults, the lender cannot claim specific assets as compensation, making credit history an essential factor in the loan process.

In contrast, other types of loans such as mortgages or auto loans typically require collateral, and personal loans are not restricted to business use, thereby making the other choices less accurate in defining the nature of personal loans. Additionally, personal loans can have variable interest rates, not limited to fixed rates only.