Advertiser Disclosure

What Is An Unsecured Loan?

Unsecured loans don't require you to put up collateral to qualify. They're loans you pay back in monthly payments, also called installments.
Jan. 24, 2020
Loans, Personal Loans
At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

An unsecured loan isn’t secured by collateral like a house or car. Instead, lenders make the approval decision based on your creditworthiness, which includes things like your credit history, income and outstanding debts.

An unsecured personal loan can be used to pay for almost anything, but getting one can be most beneficial if it helps you achieve a financial goal.

Borrowers with good and excellent credit (FICO scores of 690 or higher) are the most likely to be approved for unsecured loans with low interest rates.

These loans are typically repaid in fixed monthly installments over one to seven years, with loan amounts ranging from $1,000 to $50,000.

If you’re considering getting one, learn what they can be used for, the pros and cons, where to get one, how to qualify and typical rates and terms.

What unsecured loans are used for

You can use an unsecured loan for almost any expense, though some lenders have restrictions on using them for things like investments and college costs.

They work best when used for one specific expense or event that will help you reach a goal, like consolidating debts into a single loan with a lower interest rate or completing home improvements that will increase your property’s value.

While there are few restrictions on unsecured loan uses, NerdWallet doesn’t recommend you use one of these loans for discretionary purchases, like a wedding or vacation, if you have cheaper options.

» MORE: Unsecured loans you can use for almost anything

Pros and cons of unsecured loans

Here’s a look at the pros and cons of unsecured loans.

Pros

  • 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. Online lenders offering unsecured personal loans provide funding as fast as the same day you apply for it.
  • Unlike with a secured loan, the lender cannot seize your property if you stop making payments.
  • Borrowers with excellent credit scores (720 to 850 FICO) may qualify for rates as low as those on secured loans. Annual percentage rates for unsecured online loans start at around 6%.

Cons

  • For lenders, unsecured loans are riskier and therefore can have higher interest rates, especially for bad-credit borrowers. Available loan amounts may also be smaller than for secured loans.
  • There are still consequences to defaulting on an unsecured loan: Your credit score will suffer, the unpaid 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.

Before taking an unsecured loan, consider the interest rate as well as the monthly payment. Use a personal loan calculator to compare estimated rates and payments based on your credit score.

Where to get unsecured 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.

Rates, terms and loan amounts for unsecured loans vary, so it pays to compare offers from multiple lenders. Here’s where to shop for loans.

Online lenders

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 deposit money directly into your bank account.

» MORE: Pre-qualify with multiple online lenders on NerdWallet

Credit unions

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%.

However, shopping for credit union loans can be more time-consuming than online loans, and there’s 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.

Banks

If you have an existing relationship with a bank, it’s worth checking if it offers unsecured loans. Your bank may offer larger loan amounts and lower rates for customers in good standing.

The downsides are bank loans typically do 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 loan

Unsecured loan rates are lowest for good- and excellent-credit borrowers with little debt and stable income.

If you don’t think you’ll qualify, here are a few tips to improve your chances of getting an unsecured loan.

  • Build your credit: Lenders weigh your credit score more heavily if there’s no collateral securing a personal loan. Work on improving your credit before applying.
  • Check your credit reports: They may have errors that are hurting your score. If you find any, dispute them. You can get your credit reports for free once a year at AnnualCreditReport.com.

» MORE: What credit score do you need for a personal loan?

  • Pay down debt: In addition to building your credit, paying off debt also reduces your debt-to-income ratio, which some lenders use to evaluate your ability to take on a new loan. A low DTI ratio indicates you’re not overwhelmed by debt.
  • Add a co-signer: If you have bad credit or don’t meet a lender’s minimum qualifications, adding a co-signer can help you qualify and get a better rate. The co-signer should have strong credit and meet the lender’s requirements.

Unsecured loan rates and fees

The average APR on unsecured personal loans for excellent credit is 13.9%, and 27.2% for bad credit, according to a NerdWallet survey of online lenders.

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 8% of the loan amount. Other loan fees may include late fees, prepayment fees — where a lender charges you for early repayment — and fees for unsuccessful payment.

About the authors