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An unsecured personal loan is a type of loan that doesn't require you to back it with collateral, such as your car or bank account balance. You can use the money in many ways and choose from a range of repayment terms.
Unsecured personal loans typically come with higher interest rates, tougher qualifications and lower loan amounts than collateralized loans. But that's often a worthwhile trade-off, since there's no risk you'll lose an asset if you fall behind on payments.
Here's what to know about unsecured personal loans and how they work.
What Is an Unsecured Loan?
An unsecured loan is an installment loan that you can get without promising to the lender that they can seize an asset if you fail to repay the loan as agreed.
When you apply, the lender will check your credit score, payment history, debt-to-income ratio (DTI), income and other factors against its requirements to see if you qualify. Since unsecured loans are riskier for lenders to offer than collateralized loans, lenders will look even more closely at your creditworthiness to make sure there's a high chance you'll make payments on time.
How Unsecured Loans Work
You can apply for an unsecured personal loan from a bank, credit union or online lender. If approved, you may be able to choose from several loan offers with varying loan amounts, interest rates and repayment lengths.
Once you accept an offer, the lender sends you the money, which you can use for almost anything. Unsecured personal loans can be used to pay for major expenses, such as a home renovation, or to consolidate high-interest debts into a single monthly payment at a lower interest rate.
After taking out the loan, you'll repay it following the loan's terms, which typically require fixed monthly payments. Although you don't risk losing collateral, missing payments could lead to late fees and severely damage your credit.
Be aware: Unsecured personal loans often come with origination fees of 1% to 10% of the loan amount, which generally get deducted from the loan disbursement you receive.
Secured vs. Unsecured Loan
Personal loans are most commonly unsecured: They're offered to you solely based on your credit and your promise to repay the debt. Secured loans, on the other hand, are common for major purchases, such as auto loans or mortgages that use the car or home as collateral. Your loan amount and terms can depend on your creditworthiness and the value of the home or vehicle you're buying with the loan. Secured personal loans may be easier to qualify for or offer lower interest rates because the lender can take the collateral if you stop repaying the loan, making them less risky for lenders.
Secured personal loans can be collateralized with cash or property, including your savings account, certificate of deposit (CD) account, money market account, stocks or car.
Here are the main differences between secured and unsecured loans:
| Secured Loan | Unsecured Loan | |
|---|---|---|
| Collateral | Required; can include assets such as your house, car or bank account balances | Not required |
| Risk to lender | Lower, since your collateral can be seized if you don't pay as agreed | Higher |
| Interest rates | Generally lower, since the lender takes on less risk | Generally higher |
| Approval difficulty | Generally lower | Generally higher |
| Loan amounts | Generally higher | Generally lower |
Pros and Cons of Unsecured Loans
Unsecured personal loans offer access to funds that you can use for almost anything, but they aren't always the best option. Consider some of the benefits and drawbacks before choosing them.
Pros
Fixed repayment terms: Personal loans have predictable repayment terms, usually from 12 to 60 months, which means you'll know exactly when you'll pay off the debt. The choice can also impact your interest rate and monthly payment; longer loan terms usually come with higher rates and higher overall costs.
Large loan amounts: Some lenders offer large potential loan amounts—sometimes up to $100,000 or $250,000—which is enough to cover most major expenses. However, your loan offers will depend on your creditworthiness, income and other factors, and it's best to borrow the lowest amount possible to save on interest and minimize the loan's effect on your credit score.
Potentially low and fixed interest rates: Personal loans may also have low interest rates, especially when compared to credit cards. Lenders may offer personal loans with variable rates, but choosing a fixed interest rate also means the rate won't change over the life of your loan.
Flexible funding: Although there are some limits (for example, you can't use a personal loan for illegal activity such as gambling), you can use personal loan funds for almost anything. You can also take out a single loan for multiple purposes, such as paying off high-interest debt and funding a wedding.
Cons
May require good credit: Because you're not offering any collateral, you may need to have good to excellent credit and a high income if you want to borrow a lot of money at favorable terms.
Fees: Lenders often charge an origination fee, which is a percentage of the amount you borrow and typically deducted from the amount you receive. If you have good or excellent credit, though, you could qualify for a loan with no origination fee.
Potentially high interest rates: Applicants who have poor credit might only be able to get an unsecured personal loan with a high interest rate—sometimes even higher than the average credit card's APR. Applicants who have good credit might find the rates are higher than what they can qualify for with a secured loan.
Interest accrues immediately: Interest will also start to accrue as soon as you take out the loan. In contrast, you may be able to use a credit card and avoid accruing interest if you pay off your balance in full each month.
How to Qualify for an Unsecured Loan
Lenders may have their own eligibility and credit requirements, which you'll need to meet if you want to take out an unsecured personal loan. Follow these steps to see if you'll likely qualify, find the best offers and get a loan.
- Check your credit score. Your credit score is extremely important when applying for an unsecured personal loan. Check your credit scores for free through Experian for an overview of what types of loans you may currently qualify for, and how you can improve your score.
- Pay off debts. Your DTI shows how your monthly income compares to your monthly debt payments and can help lenders make sure you can afford a new loan. Paying off existing debts can improve your DTI, making it easier to qualify for a personal loan.
- Add up all your income. Review the types of income you can add to your application, such as income from investments, gig work, ongoing insurance payments, alimony or child support. Ensuring you don't miss any income sources will strengthen your financial profile and bring your DTI as low as possible.
- Gather loan offers. Once you're ready to apply, prequalify with several lenders. You'll be able to see potential loan terms by answering a few basic questions, and the lenders will conduct a soft credit inquiry only—the type that doesn't affect your credit scores.
- Apply. Once you compare offers and choose a lender to work with, you'll submit a complete application and agree to a hard credit inquiry. Since a hard inquiry will lead to a brief, minimal drop in your credit score, it's best to get prequalified first so you know you're likely to get approved.
- Receive funds. After approval, you may get the loan proceeds within minutes, or in up to five days, depending on the lender.
Frequently Asked Questions
How Much Can I Borrow With an Unsecured Personal Loan?
The most common loan amounts offered by lenders range from $1,000 to $50,000. But you can find unsecured personal loans for less than $1,000 and for up to $100,000 or more.
How Long Does It Take to Get an Unsecured Personal Loan?
Lenders have varying turnaround times, but you can expect to get an initial approval within one day to one week. After approval, you can then receive funds within an hour or in up to five days. Online lenders often have the fastest process from beginning to end.
Do Unsecured Personal Loans Hurt Your Credit?
The lender will perform a hard credit inquiry when you submit a full application, which can lead to a temporary dip in your credit score. The most severe damage comes from missing personal loan payments, since payment history is the biggest factor in your credit score.
The Bottom Line
Unsecured personal loans can be useful tools for consolidating debt or managing a single large expense. If you have fair or poor credit, a secured loan may be a better option—or you can add a creditworthy cosigner to your application or borrow from friends or family instead. With good or excellent credit, you're most likely to qualify for unsecured loans with low rates, minimal origination fees and high loan amounts.