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Unsecured Personal Loans: What to Know About This No-Collateral Option

Unsecured loans do not require you to pledge an asset to qualify, but they may carry higher interest rates.
June 10, 2019
Loans, Personal Loans
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Unsecured loans are not backed, or secured, by an asset such as a house, car or savings account. Personal loans are commonly unsecured loans used to consolidate debt or cover a large expense. Qualifying depends mainly on your creditworthiness rather than the value of an asset you pledge.

If you’re considering an unsecured personal loan, learn the pros and cons, where to get an unsecured loan, how to qualify, and typical rates and terms.

Pros and cons of unsecured loans

Unsecured personal loans make sense if you qualify for an affordable rate and you don’t want to put up collateral. They work best for specific one-time needs, such as consolidating debt or funding home improvements. 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.
  • 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 5%.

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 rate as well as the monthly payment. Use a personal loan calculator to compare estimated rates and payments based on your credit score.

» MORE: When should I get a personal loan?

Where to get unsecured personal loans

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 impacted.

» MORE: Compare unsecured personal loans online

Credit unions

Credit unions are nonprofit 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%.

Shopping for credit union loans can be more time-consuming than online loans, and there’s no option to pre-qualify.

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 be able to offer a larger loan amount 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 they may require you to apply in person.

» MORE: Where to get a personal loan

How to qualify for an unsecured loan

Here’s how you can improve your chances of qualifying for unsecured loans.

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 for errors that may be hurting your score, and if you find any, dispute them. You can get your credit reports for free once a year at AnnualCreditReport.com.

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.

» MORE: Ways to boost your odds of getting approved for a personal loan

Rates, fees and terms on unsecured loans

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.

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 and fees for unsuccessful payment.

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

» MORE: Current personal loan interest rates

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