What Is an Unsecured Personal Loan?
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Unsecured loans do not require collateral, like a house or car, for approval. Instead, lenders issue these loans based on information about you, like your credit history, income and outstanding debts.
Unlike with a mortgage or auto loan, if you don't repay an unsecured loan, a lender can't repossess any of your personal belongings. The lender may instead file a lawsuit, but the majority of the hit will be to your credit.
You can use funds from an unsecured personal loan to pay for almost anything, but the best personal loan helps you achieve a financial goal without adding unmanageable debt.
If you’re considering an unsecured loan, learn the pros and cons, what they can be used for, where to get one and how to qualify.
» MORE: Compare unsecured personal loans
How unsecured personal loans work
You borrow an unsecured loan in a lump sum, usually from $1,000 to $100,000, and repay it, plus interest, in monthly installments.
Annual percentage rates on unsecured personal loans range from about 6% to 36%. The APR on loans for borrowers with excellent credit (720 to 850 FICO) is around 11.2% and about 25.3% for bad-credit borrowers (below 630 FICO), according to an analysis of anonymized offers from users who pre-qualified using NerdWallet's lender marketplace.
The loan’s APR includes any upfront fees, including origination fees, which some lenders charge for processing a loan. Origination fees typically range from 1% to 10% of the loan amount. Other loan fees may include late fees, prepayment fees — where a lender charges you for early repayment — and fees for an unsuccessful payment.
Online lenders, banks or credit unions generally offer safe unsecured loans. These lenders will assess your ability to afford the loan and report payments to the three major credit bureaus — Equifax, Experian and TransUnion. On-time payments could improve your credit, while late payments are likely to hurt it.
Pros and cons of unsecured personal loans
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.
Unlike with a secured loan, the lender can’t take your property if you stop making payments on an unsecured loan.
Borrowers with excellent credit scores may qualify for rates as low as those on secured loans.
Unsecured loans are riskier for lenders and therefore can have higher interest rates, especially for bad-credit borrowers.
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.
Types of unsecured personal loans
Lenders may market unsecured personal loans for different purposes, like home improvement loans or wedding loans, but they share common features. They typically range from $1,000 to $100,000 and are repaid in fixed monthly installments over two to seven years.
Loans that improve your financial health: Home improvement and debt consolidation loans can contribute to your financial goals. With a home improvement loan, you can make updates to your home that increase its value. A debt consolidation loan with a low interest rate can be a less expensive way to pay down existing debt. These are among the best ways to use a personal loan.
Loans for discretionary expenses: NerdWallet generally recommends saving for discretionary expenses like vacations. If you need to finance this kind of expense, you could get a lower rate on a personal loan than a credit card. Compare all your options, and only get a loan for these purposes if it’s the cheapest one.
Loans for unplanned expenses: Unsecured loans for things like emergencies and medical bills should be considered as a last resort. You likely have cheaper alternatives in an emergency, like a medical payment plan or a local resource. If you urgently need a loan, look for a lender that offers fast funding, low rates and minimal fees.
Where to get unsecured personal loans
You can get an unsecured loan from an online lender, bank or credit union. Each type of lender has its own set of benefits and drawbacks, and rates, terms and loan amounts vary.
When comparing loans from different lenders, consider the interest rate as well as the monthly payment. Use a personal loan calculator to get estimated rates and payments based on your credit score.
Most online lenders offer pre-qualification, a short process that involves submitting basic personal information and, within minutes, getting a preview of the loan you may receive, including the loan amount, estimated rate and terms.
Online lenders usually do a soft credit check with pre-qualification, so your credit score won’t be affected.
Online is usually the fastest way to get a loan. These lenders can give you an application decision in minutes, and some can deposit money directly into your bank account within a day or two.
Credit unions are not-for-profit financial organizations that may provide better rates for borrowers with fair or bad credit scores (689 or below). Federal credit unions cap APRs at 18% unless you’re applying for a short-term, small-dollar loan.
However, shopping for credit union loans can be more time-consuming than online loans, and there’s usually no option to pre-qualify.
You must also be a member of the credit union to be eligible for a loan. Membership typically requires living or working near the credit union or being associated with a particular group the credit union serves, and paying a small fee and one-time deposit up to $25.
If you have an existing relationship with a bank, it’s worth checking whether it offers unsecured loans. Your bank may offer larger loan amounts and lower rates for customers in good standing.
The downsides are bank loans may not let you pre-qualify with a soft credit pull, they often accept only borrowers with strong credit scores and some require you to apply in person.
» MORE: How do bank loans work?
How to qualify for an unsecured personal loan
Here are some of the things lenders will review when deciding whether you qualify for a loan and at what rate.
Credit: For many lenders, 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. Bad-credit borrowers 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, and the longer, the better.
Debt-to-income ratio: Lenders look at your debt-to-income ratio — which is your monthly debt payments as a percentage of your monthly income — to evaluate how burdened you already are with debt. Too much debt, and a lender may decide the risk that you’ll struggle to pay a loan back is too high. Some lenders prefer applicants with a DTI below 40%.
Bank account transactions: Some lenders look at your bank account to see how much money you have coming in and going out. This helps a lender understand how loan payments would fit into your monthly budget.
Apply for an unsecured personal loan
Before you apply for a loan, pre-qualify to see what rates and terms lenders can offer you. You can pre-qualify with NerdWallet to see offers from multiple online lenders. Pre-qualifying does not impact your credit score.
You can take those offers and compare them with loans that other lenders, like banks, may offer.
Once you’re ready to apply, you'll need to gather documentation, such as W-2s and bank statements, and begin the online or in-person application with the lender you’ve chosen.