Unsecured Loan: What It Is, How It Works And How To Get One (2024)

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If you need to finance an upcoming project, unexpected expenses or even tuition, unsecured loans can help you get financing without pledging collateral like your home. These loans often come with less demanding qualification and application requirements than secured loans, and many lenders offer same- or next-day funding.

That said, unsecured loans pose more risk to lenders so you may be faced with higher rates and less favorable terms compared to secured loans. We’ll show you how unsecured loans work and help you decide if they’re a good fit for you.

What Is an Unsecured Loan?

Also called good faith loans or signature loans, unsecured loans are those that do not require the borrower to pledge any collateral. Common types of unsecured loans include personal loans, student loans and unsecured credit cards. You can get these loans from a wide range of traditional, online and government-backed lenders, and the application process is often less rigorous than for secured loans.

Secured vs. Unsecured Loans

Because unsecured loans don’t require collateral, they are riskier for lenders than secured loans—instead of seizing assets if a borrower defaults, banks are limited to collection actions like wage garnishment. To limit their risk when extending unsecured loans, banks and other lenders often require a higher credit score to qualify. Unsecured loans also come with higher interest rates and less favorable terms than their secured counterparts.

Related: Unsecured vs. Secured Loans

How Unsecured Loans Work

Unsecured loans typically range from $1,000 to $100,000, which you can use for a range of purposes. In general, annual percentage rates (APRs) range from about 6% to 36%, and loan terms often extend from two to seven years. However, loan amounts, rates, terms and permitted uses vary by lender, so borrowers should shop for loans that meet their individual needs.

Many lenders offer online prequalification so you can compare likely rates without having to apply and undergo multiple hard credit checks. Depending on the lender, prospective borrowers also may be able to apply for a loan—and receive a lending decision—online. And, because unsecured loans don’t require collateral, applicants don’t need to wait for an appraisal or otherwise demonstrate the value of any assets.

Once an unsecured loan is approved, funds are disbursed as a lump sum and interest begins to accrue on the entire loan amount. With unsecured credit cards and other lines of credit, the borrower can use the funds on an as-needed basis and interest only accrues on the outstanding balance. Payments must be made on a monthly basis and are typically reported to the three major credit bureaus, though there is typically a grace period when reporting late payments.

What Happens If You Don’t Pay Back An Unsecured Loan?

If you default on an unsecured loan, the lender will send your missed payments to a collection agency. This will result in collection calls and, following continued nonpayment, may necessitate legal action to recoup the outstanding debt.

If such legal action succeeds, the lender may recoup the loan balance through wage garnishment or, in the case of federal student loans, seizure of future income tax refunds. A lender may also place a lien on your home or another valuable asset. What’s more, the default will result in a significant drop in your credit score and will remain on your credit report for as long as seven years.

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Types of Unsecured Loans

There are many types of unsecured loans that you can use for a wide range of purposes. Not only can borrowers access traditional term loans—like personal loans and student loans—there are also unsecured revolving loans like credit cards and personal lines of credit. These are the most common types of unsecured loans:

  • Unsecured personal loans. Personal loans are most commonly unsecured, though some lenders offer secured options. You can use this type of unsecured loan for a range of personal uses, including everything from unexpected medical bills to home improvement projects and travel. Just check with your lender to make sure your intended use is permitted before getting a personal loan.
  • Personal lines of credit. If you’re facing expenses that will be spread over an extended period of time—like for home renovations—a line of credit lets you access funds on an as-needed basis. And, while certain lines of credit are secured, like home equity lines of credit, many lenders offer unsecured options.
  • Unsecured credit cards. Credit cards are a type of revolving loan that lets borrowers access a certain amount of spending power that must be paid down each month. While secured credit cards are available, most consumer cards do not require collateral.
  • Student loans. Both government-backed and private student loans are unsecured. That said, government-backed lenders may accelerate a loan so that it’s due immediately and can seize a borrower’s federal tax refund to recoup the outstanding loan balance.

Who Should Get an Unsecured Loan?

Unsecured loans are a great financing option for people who don’t want to offer up collateral, which is something of value a lender can repossess to recoup its losses if you default.

However, the lender takes on more risk without collateral and typically charges higher interest rates to compensate for the added risk. But if you have a credit score of at least 720, you can improve your chances of getting the lowest interest rates, so it can be a win-win for certain borrowers—no collateral with the lowest interest rates.

If you have limited credit and don’t qualify for unsecured loans, consider a secured loan as an alternative option.

How to Get an Unsecured Loan

The application process for an unsecured loan is more straightforward than for secured loans,
and you can often complete it online. Still there are a few important steps to take to ensure you’re getting the best deal from your lender. Follow these five steps when applying for an unsecured loan.

1. Check Your Credit Score

Borrowers should have a credit score between at least 610 and 640 to qualify for a personal loan, but the most competitive rates are reserved for those with a FICO score of at least 720. Use a free online service to check your credit score before you apply. Not only will this help you anticipate your likelihood of approval, checking your score gives you the opportunity to improve it before you even submit your loan application.

2. Evaluate Your Budget

After reviewing your credit score, take some time to evaluate your current income and expenses. While you won’t have any collateral at risk with an unsecured loan, late payments will still impact your credit score, so it’s important that any new debt payments fit within your budget.

What’s more, most lenders consider a borrower’s debt-to-income ratio (DTI) when reviewing their loan application. This metric represents the percentage of a borrower’s income she must commit to outstanding debt payments each month. Ideally, you should have a DTI of 36% or less to qualify for a new unsecured loan, but this requirement varies by lender.

3. Shop for Lenders and Prequalify

Once your finances are in order, start shopping for lenders that offer the most competitive APRs and flexible repayment terms. Luckily, many lenders offer prospective borrowers a quick and easy online prequalification process. This lets future borrowers see what kind of APRs and loan terms they’re likely to qualify for without submitting their application.

4. Gather Documentation

If you’ve found a promising lender and are ready to take the plunge, research its application process. Though not necessary, collecting any necessary documentation like tax returns or W-2s before you apply can speed up the application, approval and funding process.

5. Submit a Formal Application

Finally, complete a loan application and submit it online or in-person. Many lenders now offer a completely online application process as well as quick approval times and same- or next-day funding. That said, the exact application process varies by lender, and you may need to discuss your loan with someone over the phone or in-person.

Where Can You Get Unsecured Loans?

You can get unsecured loans from three types of institutions:

  • Online lenders. These are often technology-based non-bank companies that offer a small range of lending products, including unsecured loans. They typically offer lower interest rates compared to traditional banks or credit unions and can provide funds within 24 to 48 hours.
  • Banks. Many local and national banks offer unsecured loans, such as personal loans. If you have an existing relationship with a bank, research its options and consider opening an unsecured loan through that bank.
  • Credit unions. These are local to your community and tend to offer applications both online and in person. Credit unions require membership, so be sure to check if you’re eligible.

Pros of Unsecured Loans

Unsecured loans are a popular financing option for borrowers, largely because of their flexibility and less stringent application requirements. Here are some advantages of unsecured loans:

  • Borrowers don’t need to own a valuable asset—like a home or vehicle—to qualify for an unsecured loan
  • Lenders cannot directly seize collateral if a borrower defaults on an unsecured loan
  • You can generally use unsecured loans for a wide variety of purposes
  • The application process is less extensive than for secured loans because it doesn’t require an appraisal of collateral

Cons of Unsecured Loans

There are still a number of disadvantages you should consider before you commit to an unsecured loan. These are the cons of unsecured loans:

  • Missed payments or default will have a negative impact on a borrower’s credit score
  • Default may result in legal action and subsequent wage garnishments
  • Due to the increased degree of risk, lenders often impose higher credit score requirements for unsecured loans than for secured loans
  • Interest rates and terms are also likely to be less favorable—especially for applicants with a weaker credit history

Frequently Asked Questions (FAQs)

Do unsecured loans go on your credit report?

Yes, both unsecured and secured loans appear on your credit report. This also means that they impact your credit score. While your score will temporarily drop when you first apply, managing your loan responsibly and repaying it on time will boost your score over time.

What's the easiest loan to get with bad credit?

The easiest loan to get with bad credit is a personal loan for bad credit. Lenders that offer these loans accept credit scores as low as 560. However, you will likely receive higher interest rates because rates are heavily influenced by your credit score.

Are unsecured loans safe?

Yes, unsecured loans are safe. Unsecured simply means you aren’t required to provide collateral—something of value like the cash in your savings account that the lender can seize if you don’t repay your loan.

Unsecured Loan: What It Is, How It Works And How To Get One (2024)


Unsecured Loan: What It Is, How It Works And How To Get One? ›

An unsecured loan is supported only by the borrower's creditworthiness, rather than by any collateral, such as property or other assets. Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval.

How do you qualify for an unsecured loan? ›

Qualifications for an unsecured loan

Generally, they look for a history of responsible credit use (typically one or more years), on-time payments, low credit card balances and a mix of account types. They'll also check your credit scores, which are calculated based on the information in your credit reports.

How can I get unsecured loan? ›

You can get unsecured loans from three types of institutions:
  1. Online lenders. These are often technology-based non-bank companies that offer a small range of lending products, including unsecured loans. ...
  2. Banks. Many local and national banks offer unsecured loans, such as personal loans. ...
  3. Credit unions.
Mar 8, 2023

Are unsecured loans hard to get? ›

Higher credit scores are often required to qualify, since there is no collateral to offset risk for lenders. Unsecured loans may come with higher interest rates than secured loans. Approval process largely leans on borrowers' credit profiles, such as score and history.

Do you have to pay back an unsecured loan? ›

If your personal loan is unsecured, which is often the case, the lender doesn't have any collateral to seize if you fail to repay. As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order.

How much money can you borrow on an unsecured loan? ›

Personal Loan Maximums

For lenders, personal loans are riskier because they have no collateral to use to recoup losses if you fail to make payments. The majority of lenders state that their maximum personal loan amount is $50,000, though some will go as high as $100,000.

What credit score do you need to get a $30000 loan? ›

In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit.

What credit score is needed for unsecured loan? ›

To qualify for a personal loan, borrowers generally need a minimum credit score of 610 to 640. However, your chances of getting a loan with a low interest rate are much higher if you have a “good” or “excellent” credit score of 670 and above.

What is the minimum credit score for unsecured personal loan? ›

The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet. Some lenders may require a higher score. A high credit score doesn't guarantee you'll qualify or get a low interest rate.

What is a good enough credit score for an unsecured loan? ›

Ideal credit score to avail a personal loan

The minimum CIBIL score for a personal loan is between 720 and 750. Having this score means you are creditworthy, and lenders will approve your personal loan application quickly. They may also offer you your chosen loan amount at a nominal interest.

What credit score do I need for a $5000 loan? ›

Requirements for a $5,000 loan vary by lender. But in general, you should have at least Fair credit, which is a score of 580 or above. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.

Why is unsecured loan risky? ›

Because unsecured loans are not backed by collateral, they are riskier for lenders. As a result, these loans typically come with higher interest rates. If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses.

What is the easiest loan to get approved for? ›

What is the easiest loan to get approved for? The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

How does unsecured loan work? ›

Unsecured personal loans work by lending you money in a lump sum — anywhere from $1,000 to $100,000 — which you repay in equal monthly installments that include interest. Annual percentage rates on unsecured personal loans range from about 6% to 36%.

Does an unsecured loan hurt credit score? ›

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

What are two disadvantages of unsecured loans? ›

Because an unsecured personal loan has no collateral backing it, you may encounter higher interest rates, fees and other things they could limit how far is the loan could go. In addition, the lack of collateral could make it hard for those with lower credit scores to get approval.

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