What type of loan is generally not backed by collateral?

An unsecured loan is characterized by the absence of collateral, making it fundamentally different from secured loans that are backed by assets. In the case of an unsecured loan, the lender provides funds based on the borrower's creditworthiness, financial history, and ability to repay the loan rather than any specific asset as security. If the borrower defaults, the lender cannot claim any property or asset to recover the amount lent, though they may pursue other measures such as legal action or affecting the borrower's credit score.

This distinguishing feature is important for borrowers to understand, as unsecured loans often come with higher interest rates compared to secured loans. The increased risk to the lender due to the lack of collateral translates into potential higher costs for the borrower. In essence, while secured loans involve a tangible asset that serves as a safety net for the lender, unsecured loans carry a higher level of risk for the lender and flexibility for the borrower, who does not have to pledge any property.