What Is an Unsecured Personal Loan?
An unsecured loan lets you borrow money without having to pledge items you own as collateral.
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Updated · 3 min read
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Head of Content, Personal & Student Loans Nerdy takeaways
- An unsecured loan is a loan you get from an online lender, bank or credit union that doesn’t require collateral.
- Approval for an unsecured loan is based on your credit score, credit history and debt-to-income ratio.
- Unsecured loans can be used for almost anything, including paying for large expenses or consolidating debt.
What is an unsecured loan?
An unsecured personal loan is a loan that doesn’t require collateral, like a car or savings account, for approval.
Instead, lenders determine whether or not to loan you money based on factors such as your credit history, income and outstanding debts. That information also helps them decide your loan amount and interest rate.
If you’re considering an unsecured personal loan, learn how they work, where to get one and how to qualify.
How do unsecured loans work?
Unsecured personal loans come in a lump sum, typically between $1,000 to $100,000. You repay them in equal monthly installments that include interest. Repayment terms typically range from two to seven years.
Annual percentage rates on unsecured personal loans range from about 7% to 36%. Borrowers with good to excellent credit (scores from the mid-600s and higher) will likely qualify for the lowest APR. Since the APR includes interest and fees, it reflects the overall cost of the loan.
For example, say you borrow $10,000 with a three-year repayment. With a 15% APR, you’ll pay $2,480 in total interest. The same loan with a 10% APR costs $1,616 in interest.
🤓 Nerdy Tip
A personal loan calculator can help you see how different loan amounts, terms and interest rates will affect your monthly payment. What can you use an unsecured loan for?
You can use an unsecured personal loan for almost any expense, although some lenders may not allow you to use the funds for college tuition, business expenses or investments.
NerdWallet recommends using a personal loan for expenses that could help your overall financial health.
For example, a home improvement loan, can enable you to make updates to your home that increase its value.
With a debt consolidation loan, you can consolidate debts like credit cards under a lower interest rate. That helps you save money on interest and pay off the debt faster.
For discretionary expenses, like those related to a vacation or wedding, look into more affordable ways to pay first, and consider a loan only if it’s the cheapest financing option available.
How are unsecured loans different from secured loans?
Unlike unsecured loans, secured personal loans require collateral — typically a savings account or vehicle. If you don’t repay a secured loan, the lender could repossess that property.
When you back up a personal loan with collateral, lenders see you as less of a risk than if they were assessing you on creditworthiness alone. So secured loans are typically easier to qualify for and offer lower rates than unsecured loans.
» DIVE DEEPER: Secured vs. unsecured loans
Pros and cons of unsecured personal loans
As with any financial product, it’s important to carefully weigh the benefits and drawbacks of unsecured loans before you sign an agreement.
Pros
Faster approval.
No collateral required.
Cons
Higher rates.
Could hurt your credit.
Pros of unsecured loans
- Faster approval: Expect to get your money more quickly with an unsecured loan than with a secured loan, which may require additional documents such as proof of title for a car.
- No collateral: Unlike with a secured loan, the lender can’t take your property if you stop making payments on an unsecured loan.
Cons of unsecured loans
- Potentially high rates: Unsecured loans are riskier for lenders than secured loans and therefore can have higher interest rates, especially for bad-credit borrowers.
- Default consequences: If you default on an unsecured loan, your credit score will be negatively affected. The remaining loan balance can be sold to a debt collection agency, prompting collections calls from an unfamiliar company, and you may be sued in an attempt to collect on the debt.
Where can I get an unsecured loan?
You can get an unsecured personal loan from an online lender, credit union or bank. These lenders will assess your ability to afford the loan and report payments to the three major credit bureaus — Equifax, Experian and TransUnion.
Online loans: Online lenders can give you an application decision in minutes, and many can deposit money directly into your bank account within a day or two. They also work with borrowers across the credit spectrum.
Credit union loans: Credit unions may provide better rates and more flexible terms for borrowers with fair or bad credit scores (scores lower than the mid-600s). Note that you need to become a member of the credit union before applying, though membership is typically quick and affordable.
Bank loans: If you already have an existing relationship with a bank, it’s worth checking whether it offers unsecured loans. Banks may offer larger loan amounts and lower rates for existing customers in good standing.
How to qualify for an unsecured personal loan
Here are some of the factors a lender will review when deciding whether you qualify for a loan and at what rate.
Credit: Your credit score is a key factor in a loan decision. An excellent credit score can get you access to the lowest unsecured loan rates and largest loan amounts. Borrowers with bad credit who qualify will likely get the highest rates.
Lenders also look at the length of your credit history. Many require borrowers to have at least two years of credit history, but longer is better.
Debt-to-income ratio: Your debt-to-income ratio is your monthly debt payments as a percentage of your monthly income.
Lenders use this information to evaluate how burdened you already are with debt and gauge how likely you are to be able to repay the loan. Most lenders prefer applicants with a DTI below 50%.
Bank account transactions: Some lenders look at your bank account to see how much money is coming in and going out. This helps a lender understand how loan payments would fit into your monthly budget.
How to apply for an unsecured loan
1. Check your credit. Check your credit report for any incorrect information, such as accounts that are incorrectly reported as delinquent or the same debt listed more than once, that could be dragging down your score.
2. Decide how much to borrow. Ideally, you would borrow enough to meet your goal. But asking for too much can hurt your chances of approval. And, if you’re approved, a loan that’s too large could leave you struggling to afford payments.
Use a personal loan calculator to plug in various loan amounts, term lengths and interest rates and view monthly payments.
3. Pre-qualify. Many lenders offer pre-qualification, a short process that involves submitting basic personal information and getting a preview of the loan you may receive.
Pre-qualifying won’t hurt your credit score. You can pre-qualify with NerdWallet for free to see offers from multiple online lenders.
4. Compare loan offers. Compare the offers from pre-qualification to select the option that’s best for you. The loan with the lowest APR is generally the best option, since it represents the least expensive loan.
5. Submit a formal application. Once you’re ready to apply, gather documentation, such as W-2s and bank statements, and complete an application with the lender you’ve chosen.
The lender will perform a hard credit check at this time, which may temporarily lower your score. Most lenders make approval decisions within a couple of days and can fund a loan within a week.
» MORE: How to get a personal loan
Unsecured loans for bad credit
If you have bad or limited credit, you may struggle to qualify for an unsecured loan. Aim to pre-qualify anyways, specifically for bad-credit loans. With no effect on your credit, there’s nothing to lose by seeing your options.
If you don’t qualify or get the rate you want, look into loans that are easier to qualify for:
- Secured loans, if you’re willing and able to risk collateral.
- Co-signed or joint loans, if you know someone willing to either vouch for you and repay if you don’t (co-signer) or share responsibility for repayment (co-borrower). Ideally, this person has better credit or higher income.
Learn more about how to get a personal loan with bad credit.
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On this page
- What is an unsecured loan?
- How do unsecured loans work?
- What can you use an unsecured loan for?
- How are unsecured loans different from secured loans?
- Pros and cons of unsecured personal loans
- Where can I get an unsecured loan?
- How to qualify for an unsecured personal loan
- How to apply for an unsecured loan
- Unsecured loans for bad credit
