Unsecured Personal Loans: Borrow With No Collateral

What is an unsecured personal loan?

An unsecured personal loan is a loan from an online lender, bank or credit union that doesn’t require collateral to guarantee the loan. Loan amounts range from $1,000 to $100,000 and are paid back monthly in terms ranging from two to seven years.

The best use of an unsecured loan is one that improves your finances. This could mean getting a loan for debt consolidation, which can reduce your debt and help you pay it off faster, or for a home improvement project, which can increase the value of your home.

What is the difference between secured and unsecured loans?

A secured loan requires you to offer collateral as part of the loan agreement. Examples of collateral include your car, house, or a savings or retirement account.

Since secured loans are backed by an asset, borrowers who have lower credit scores may qualify for a better interest rate or higher loan amount compared with an unsecured loan. But there’s a catch — if you fail to repay a secured loan, the lender can seize your collateral.

With an unsecured loan, you don’t risk collateral, but it may be harder to qualify. Lenders look at credit score, credit history, income and existing debt when deciding whether to approve you.

Pros and cons of secured and unsecured loans

How do unsecured loans work?

To get an unsecured loan, you’ll need to apply with a bank, credit union or online lender that offers personal loans.

If you’re approved, you’ll receive the money in a lump sum in your account. You’ll then repay the loan in monthly installments spread out over a set repayment term.

Monthly payments are typically fixed, meaning they won’t change over the life of the loan.

What is the interest rate on an unsecured personal loan?

The interest rate on an unsecured personal loan typically ranges from 6% to 36%. It’s expressed as an annual percentage rate, or APR, and includes interest and any fees associated with the loan.

For example, if you apply for a $7,000 unsecured personal loan at 15.5% APR and choose a two-year repayment term, you’ll make monthly payments of $341. The loan will cost $1,186 in total interest.

Here’s a look at average personal loan interest rates, based on your credit bracket.

Common uses for unsecured personal loans

Though an unsecured personal loan can be used for almost any purpose, NerdWallet recommends using one when it can improve your finances. Debt consolidation and home improvement are two common examples.

Unsecured personal loans for debt consolidation

Debt consolidation involves combining debt from multiple sources into a single monthly payment, ideally at a lower interest rate. Using an unsecured personal loan to consolidate can save money on interest and give you an end date to work toward.

» COMPARE: Best debt consolidation loans

Unsecured personal loans for home improvement

Using an unsecured personal loan for home improvement is an option if you don’t have a lot of equity in your home or want to avoid using your home to secure the loan. By financing important repairs or updates, you can potentially increase the value of your home.

» COMPARE: Best home improvement loans

Other ways to use unsecured personal loans

You can use an unsecured personal to pay for medical expenses that aren’t covered by insurance or savings. However, it can be an expensive way to finance health-related expenses, and you may have cheaper options, so shop around before you apply.

You can also use an unsecured loan to fund a one-time, big expense like a move, wedding or vacation, though we recommend paying with savings whenever possible to avoid finance charges. Unsecured loans can also finance large purchases, such as a boat, motorcycle or RV, though these loans are often secured by the vehicle you’re buying.

How to qualify for an unsecured personal loan

Lenders may have different qualification requirements, but there are some general factors that help you qualify for low rates.

Good credit. Good- and excellent-credit borrowers (690 credit score or higher) typically get the lowest APR on a personal loan. Some lenders cater to fair- and bad-credit borrowers (689 credit score or lower), but the best terms and rates are reserved for those with high credit scores.

Low debt-to-income ratio. Many lenders check if your debt-to-income ratio is low enough to support monthly repayments. Some say borrowers need a 40% DTI or lower to qualify, but others have higher limits.

Stable credit history. Lenders favor borrowers who can show that they’ve consistently made on-time payments across multiple accounts — which can be credit cards, auto loans or other installment loans — over a number of years. Aim for at least two or three years of credit history across two or three accounts.

Steady income. Having a steady income can signal to a lender that you'll have the funds available to repay your loan.

How to apply for an unsecured personal loan

Pre-qualify: Make sure to shop around for the best unsecured personal loan. An easy way to do this is by pre-qualifying with multiple lenders, which allows you to see your potential loan amount and rate without affecting your credit score. Though not all lenders offer pre-qualification, most online lenders do.

» MORE: Pre-qualify with online lenders for free on NerdWallet

Apply: Once you’ve chosen a lender, it’s time to apply for the loan. Many applications are completely online and require you to submit personal details, such as your name, address, contact details and Social Security number.

You’ll also need to submit documentation — usually proof of identity, employment and income.

Get funded: Once you’re approved, funding time can vary by lender. But in some cases, your loan can be funded the same or next business day after you’re approved.

Unsecured personal loan alternatives

You may want to consider alternatives along with a personal loan, depending on what you're financing.

0% APR credit card: These cards work well if you need to finance a major expense, repay medical bills or consolidate debt. You need good or excellent credit to qualify and debt small enough to be repaid in the card's interest-free promotional period, which can last up to 21 months.