Typically, unsecured loans from institutions require some kind of credit check. They'll look at your track record (the credit score) to measure your ability to repay. If they see that you've taken out several loans and paid them back on time, they might think huh, they're pretty reliable. Let's lend them some money.
At that point, the institution gives you the money, but it comes with strings attached. Those strings are interest rates. To get the money now, you need to accept that you'll be paying back a higher amount later.
You might be familiar with this model if you use a credit card. If you don't pay your bill for a given period, you get charged interest until you repay the full balance (and additional fees).
Sometimes a good credit score isn't enough. Even if you've repaid all of your loans on time for decades, you'll have a tough time borrowing large sums of money based solely on your creditworthiness. In these cases, you need to put up collateral.
If you ask someone for a big loan, it's risky for them to accept it. To lower their risk a bit, they'll demand that you put some skin in the game. An asset of yours – it could be anything from jewelry to property – will become the lender's if you fail to pay them back in time. The idea here is that the lender can then recover some of the value that they've lost. In a nutshell, that's collateral.
Suppose that you now want a $50,000 car. Bob trusts you, but he doesn't want to give you the money in the form of an unsecured loan. Instead, he asks that you put up some collateral – your collection of jewelry. Now, if you fail to repay the loan, Bob can seize your collection and sell it.
Let's call a flash loan an unsecured loan, purely because you don't provide any collateral. But you also don't need to pass a credit check or anything like that. You simply ask the lender if you can borrow $50,000 in ETH, they say yep! Here you go! and you're off.
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