Explanation
The word describes who made something, not how it looks, which is where most of the confusion in this category comes from. A brand can commission UGC, pay for it, brief it and run it as an ad, and it is still called UGC because the aesthetic and the point of view are the creator's rather than the marketing department's.
What makes the format work is that it does not read as an advertisement in a feed of things that are not advertisements. The handheld framing, the imperfect audio and the first-person delivery are not shortcomings the format tolerates, they are the signals that earn attention. Spending more to remove them makes the video worse at its job.
That is also why UGC is usually bought by volume rather than by quality. One highly produced spot has to be right; twenty casual ones only need one of them to land, and you find out which by posting all twenty.
The common mistake
Treating UGC as a cheaper way to make an ad. It is not a budget tier, it is a different format with a different mechanic, and a UGC video that is shot and paced like a commercial gets the worst of both.