Unsecured Loans: Borrowing Without Collateral (2024)

What Is an Unsecured Loan?

An unsecured loan is a loan that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness.

Examples of unsecured loans include personal loans, student loans, and credit cards.

Key Takeaways

  • 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.
  • Credit cards, student loans, and personal loans are examples of unsecured loans.
  • If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court.
  • Lenders can decide whether or not to approve an unsecured loan based on a borrower’s creditworthiness, but laws protect borrowers from discriminatory lending practices.

Unsecured Loans: Borrowing Without Collateral (1)

How an Unsecured Loan Works

Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower’s credit score.Typically, borrowers must have high credit scores to be approved for unsecured loans.

An unsecured loan stands in contrast to a secured loan, in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the lender’s “security” for providing the loan. Examples of secured loans include mortgages and car loans.

Because unsecured loans require higher credit scores than secured loans, in some instances, lenders will allow loan applicants with insufficient credit to provide a co-signer. A co-signer takes on the legal obligation to fulfill a debt if the borrower defaults. This occurs when a borrower fails to repay the interest and principal payments of a loan or debt.

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. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim any property. But the lender can take other actions, such as commissioning a collection agency to collect the debt or taking the borrower to court. If the court rules in the lender’s favor, the borrower’s wages may be garnished.

Also, a lien can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults can have consequences for borrowers, such as lower credit scores.

Types of Unsecured Loans

Unsecured loans include personal loans, student loans, and most credit cards—all of whichcan be revolving or term loans.

A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include credit cards and personal lines of credit.

A term loan, in contrast, is a loan that the borrower repays in equal installments until the loan is paid off at the end of its term. While these types of loans are often affiliated with secured loans, there are also unsecured term loans. A consolidation loan to pay off credit card debt or a signature loan from a bank would also be considered unsecured term loans.

In recent years, the unsecured loan market has experienced growth, powered partly by financial technology (fintech) firms. The past decade, for example, has seen the rise of peer-to-peer (P2P) lending via online and mobile lenders.

$1.295 Trillion

The amount of U.S. consumer revolving debt in Oct. 2023, according to the Federal Reserve.

If you’re looking to take out an unsecured loan to pay for personal expenses, a personal loan calculator is an excellent toolfor determining what the monthly payment and total interest should be for the amount you’re hoping to borrow.

Unsecured Loan vs. Payday Loan

Alternative lenders, such as payday lenders or companies that offer merchant cash advances, do not offer secured loans in the traditional sense. Their loans are not secured by tangible collateral in the way that mortgages and car loans are. However, these lenders take other measures to secure repayment.

Payday lenders, for example, require that borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. Many online merchant cash advance lenders require the borrower to pay a certain percentage of online sales through a payment-processing service such as PayPal. These loans are considered unsecured even though they are partially secured.

Payday loans may be considered predatory loans, as they have a reputation for extremely high interest and hidden terms that charge borrowers added fees. In fact, some states have banned them.

Special Considerations

While lenders can decide whether or not to approve an unsecured loan based on your creditworthiness, laws protect borrowers from discriminatory lending practices. The enactment of the Equal Credit Opportunity Act (ECOA) in 1974, for example, made it illegal for lenders to use race, color, sex, religion, or other non-creditworthiness factors when evaluating a loan application, establishing terms of a loan, or any other aspect of a credit transaction.

While lending practices have gradually become more equitable in the United States, discrimination still occurs. In July 2020, the Consumer Financial Protection Bureau (CFPB), which takes the lead in supervising compliance and enforcing the ECOA, issued aRequest for Informationsoliciting public comments to identify opportunities for improving what the ECOA does to ensure nondiscriminatory access to credit. “Clear standards help protect African Americans and other minorities, but the CFPB must back them up with action to make sure lenders and others follow the law,”stated Kathleen L. Kraninger, then-director ofthe CFPB.

What Is Considered Collateral?

Collateral is any item that can be taken to satisfy the value of a loan. Common forms of collateral include real estate, automobiles, jewelry, and other items of value.

Is a Co-Signed Loan Considered Secured?

Although having a co-signer may help you get approved for a loan, it doesn’t make the loan secured. In the case of a default, the lender would require the co-signer to repay the loan.

Can Bankruptcy Eliminate all Unsecured Loans?

Declaring bankruptcy is a serious undertaking, but in most cases, it will clear your unsecured loans. There is one exception, though: student loans. To have student loans forgiven, the debtor must prove that the loans present an undue hardship during an adversary proceeding. Private student loans used to pay for living expenses are more likely to be forgiven, though a new streamlined adversary proceeding paperwork is making it easier for even federal student loans to be discharged.

The Bottom Line

Unsecured loans are common but can bear significant risk for both the lender and the borrower. Before taking out any unsecured loan, assess your financial health and your ability to repay the loan. Borrowing money that you can’t repay can result in garnishment of wages and tax returns and put the borrower on a difficult path back to solvency.

Unsecured Loans: Borrowing Without Collateral (2024)


Unsecured Loans: Borrowing Without Collateral? ›

What is an Unsecured Personal Loan? A Personal Unsecured Installment Loan provides you access to the money you need without using your property as collateral. You receive funds in one lump sum and pay it off through monthly payments over a fixed term of your choosing.

Do unsecured loans not require collateral? ›

An unsecured loan is a loan that doesn't require you to pledge an asset, such as a house or car, as collateral. Instead, approval is based primarily on your credit score and finances.

What loans do not require collateral are known as unsecured loans? ›

An unsecured loan requires no collateral, though you are still charged interest and sometimes fees. Student loans, personal loans and credit cards are all example of unsecured loans.

Can I get approved for a loan without collateral? ›

Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower's credit score.

What is the largest unsecured loan I can get? ›

Maximum loan amounts vary by lender, and the amount you can borrow if you qualify depends on various factors, such as your credit score, income and debt-to-income ratio (DTI). That said, lenders such as SoFi and LightStream offer unsecured loans up to $100,000 to well-qualified borrowers.

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.

What is a hardship loan? ›

What Is A Hardship Loan? A hardship loan is a type of financing that helps people dealing with a financial crisis caused by an emergency expense or an income shortfall. You can use a hardship loan to cover everything from a surprise medical or car repair bill to necessities like food and rent.

How hard is it to get an unsecured loan? ›

A personal loan generally is not hard to get as long as you have enough income to repay the loan. You can get personal loans from banks, online lenders, and credit unions, and you should be able to get approved with a credit score of 580 or higher.

How to get $2,000 dollars fast with bad credit? ›

Borrowers who need the funds urgently and lack other options to borrow money.
  1. Payday-alternative loan. Offered by select federal credit unions, payday alternative loans offer amounts of up to $2,000. ...
  2. Credit card cash advance. ...
  3. Payday loan. ...
  4. Title loan.
Mar 25, 2024

How much can I borrow unsecured personal loan? ›

Lenders like LightStream and SoFi offer personal loans up to $100,000, but these are among the most competitive loans in the market. Most lenders offer up to $50,000 or less. Regardless of the maximum amount offered by the lender, the amount you qualify for will depend on your credit and finances.

How to get instant loan without collateral? ›

You can opt for a personal loan, which is unsecured and hence does not need any security as collateral. What are the eligibility criteria for collateral-free loans? The eligibility criteria vary from lender to lender. Usually, the criteria include age, monthly income, CIBIL Score, and so on.

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.

What to do if you have no collateral? ›

The types of financing you may be able to get without having to provide collateral upfront include:
  1. Term Loan.
  2. Invoice Financing (also known as “accounts receivable financing”)
  3. Inventory Financing.
  4. Merchant Cash Advance.
  5. Equipment Financing.
  6. Purchase Order Financing.
  7. Line of Credit.

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

Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt. Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender's lowest interest rate, borrowers typically need a score of at least 800.

What credit score is needed for unsecured 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.

Do unsecured loans have collateral banking? ›

An Unsecured Loan is a loan that does not require you to provide any collateral to avail them. It is issued to you by the lender on your creditworthiness as a borrower.

What are the requirements for an unsecured loan? ›

Simply provide the following:
  • Current job letter.
  • Last Three (3) months' pay slips.
  • One form of identification i.e. either Driver's License, National ID or Passport.
  • Tax Registration Number (TRN)
  • Proof of address.

What is bad about an unsecured loan? ›

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.

Can an unsecured loan be guaranteed? ›

Unsecured loans are not backed by an asset or collateral, but that doesn't mean a lender is without recourse. Often, when providing this type of financing, lenders require borrowers to sign a personal guarantee.

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