What Is an Unsecured Personal Loan?

An unsecured personal loan is a loan that doesn’t require collateral, like a car or savings account, for approval.

Instead, lenders use factors like your credit history, income and outstanding debts to qualify you and set your loan amount and interest rate. Those with strong credit have the best chances of qualifying and getting the lowest rates.

If you’re considering an unsecured personal loan, learn how they work, where to get one and how to qualify.

» COMPARE: Our picks for the best unsecured personal loans

How do unsecured personal loans work?

Unsecured personal loans come in a lump sum, typically from $1,000 to $100,000. Your lender sends the money to your bank account within a couple days of approval. You then repay the loan in equal monthly installments, typically over two to seven years.

The loan's annual percentage rate (APR) includes interest and origination fees and reflects the overall cost to borrow. APRs on unsecured personal loans range from about 6% to 36%, while origination fees (which not all lenders charge) are from 1% to 10% of the loan amount. Lenders typically deduct this fee from the loan proceeds.

Rates on unsecured personal loans

While lenders weigh many factors when assessing your loan application, your credit score is a primary indicator of how likely you are to repay a loan. If your credit is good or excellent, lenders see you as less risky and may offer a lower interest rate.

Here are average rates by credit band received by borrowers who pre-qualified through NerdWallet over the last 30 days.

Estimate your monthly payment

The loan amount, interest rate and term determines your monthly payment on a personal loan.

For example, say you borrow $10,000 with a three-year repayment term. If the interest rate is 15%, you’ll pay $347 each month and $2,479 in total interest.

The same loan with a 10% rate costs $323 each month and $1,616 in total interest.

A personal loan calculator can help you estimate your monthly payment.

What can I 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 combine debts like credit cards into a single balance with a lower interest rate. That helps you save money on interest and pay off the debt faster.

For discretionary expenses, like 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.

» MORE: Learn the top reasons to get a personal loan

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 have 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 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.

• More widely available than secured loans: You’ll have more options to choose from with an unsecured loan, as many major lenders don’t offer secured personal loans.

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.

• Stricter credit requirements: Because there’s no collateral to seize if you default, approval for unsecured loans is based mostly on your creditworthiness and ability to repay. Many lenders require good credit and low debt levels.

• 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. You could also be sued over 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 at least one of 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 690). 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 lenders 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%.

» MORE: Calculate your debt-to-income ratio

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.

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 involves a soft credit check, so it won’t hurt your 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’s 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 same-day approval decisions and can fund a loan within a day or two.

» 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. There’s no effect on your credit, so you have 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 the loan if you can’t (co-signer) or share responsibility for repayment (co-borrower). Ideally, this person has better credit or higher income.