Why is Rate of Interest High on Unsecured Loans?

By: Aisha Cristal

Have you ever heard of a free lunch? No, because there isn't any on this earth. Everybody shares a relation of mutual give and take with the other. Our interdependency on the others is the basis of all relationships. So, whether it's personal, social or financial, you have to reciprocate equally and respectively to get something.

Same is the case with unsecured loans. You avail money without security and pay a high interest to compensate the risk involved for the lender. Charging a high interest is legitimate on the part of the lender since he is letting you procure money without any collateral.

Unsecured loans are personal loans where the lender has no claim on the borrower's property should he fail to repay. Instead, the lender relies solely on the ability of a borrower to meet their loan borrowing repayments.

However, in some cases the lender may give a low interest rate on the unsecured loans. This happens when:

  • Your credit score is above 650 on the scale of 800
  • You DTI ratio is less than 0.36
  • You are a regular customer of the lender
  • You have never defaulted on any loan


Unsecured loans are granted solely on the charter and the capacity of the borrower to repay. Should he fail, the lender would have to bear the heat and suffer loss. Moreover, in case of unsecured loans, the legal proceeding like filing a case against the borrower is a long and expensive procedure for the lender. Most lenders refrain from this as when a borrower defaults on many loans, the unsecured loan is the last one to get paid off. In most cases, the borrower's assets are used to pay the secured and mortgage lenders. So, unsecured loans are actually a risky adventure for the lender.

Unsecured Loans
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