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Published November 15, 2022

What is an Unsecured Personal Loan?

An unsecured personal loan doesn’t require collateral and typically has a faster approval process. However, it may come with higher interest rates.

An unsecured personal loan is a lump sum of money you borrow from a bank, credit union or alternative lender that isn’t backed by collateral, such as your home or car. You must pay back the loan with interest according to a set payment schedule.

Secured vs. unsecured personal loan

The key difference between these two types of loans is that to get a secured loan, you must provide collateral to protect the lender. If you don’t pay back the borrowed amount, the lender can seize the asset you used as collateral. Unsecured loans don’t require you to provide collateral.

Because collateral reduces the risk of nonpayment, secured loans have lower interest rates. With an unsecured loan, personal loan rates are higher because the lender takes on more risk.

Pros and cons of unsecured personal loans

Unsecured personal loans have many benefits compared to secured loans. But they also come with some downsides, which you should consider before you apply.


  • No collateral required. Unsecured loans don’t require you to back your agreement to repay the funds with an asset, like your home or car. This means you avoid the chance of having the lender seize the asset if you default on payments, which is a huge risk of secured loans.
  • Faster application process. An unsecured loan is much faster to get because there is no collateral to verify. When you provide collateral, a lender needs time to do the research to confirm the value of the asset.
  • Freedom to use the funds for anything. You can use an unsecured loan to pay for anything you need, such as a home renovation, a new car or a vacation. You can even use it to pay off and consolidate higher-interest debt, like credit card balances.
  • Potential positive effect on your credit score. As long as your creditor is reporting your payments to one of Canada’s credit bureaus and you’re diligent about making all your payments on time, an unsecured loan could help improve your credit score over time.


  • Harder to get. In the absence of collateral to protect lenders against default, financial institutions tend to be more judicious when approving loan applications.
  • Difficult to qualify with bad credit. Since many lenders require a good credit score for an unsecured loan, it can be hard to qualify if you have bad credit, unless you go to an alternative lender.
  • Higher interest rates. The lender takes a greater financial risk, since they can’t seize an asset if you default on your payments. The lender passes on the cost of this risk to the borrower in the form of a higher interest rate.
  • Defaulting will negatively impact your credit score. Just as making all your payments on your loan can improve your credit score, being late with payments or missing payments altogether will have a significant negative effect on your score.
  • Smaller loan amounts. Lenders may mitigate the risk of a borrower defaulting on unsecured loan payments by offering smaller loan amounts.

Applying for an unsecured personal loan

Most lenders accept loan applications online and in-person. Make sure you meet the eligibility requirements, have all the required documents, and have completed the application to speed up the process.


The lender eligibility requirements may vary, but may require that you:

  1. Are a Canadian resident and the age of majority in your province or territory.
  2. Are employed or have other steady income.
  3. Consent to a credit check to get your score, learn about your payment history, and see that you’re not already carrying too much debt — which could indicate you’d have a hard time making payments.


You may require some of the following documentation to get an unsecured personal loan:

  1. A pay stub to show proof of employment and income.
  2. Your Social Insurance Number (SIN).
  3. Proof of your address, such as your driver’s license or a hydro or phone bill.
  4. Details about your chequing account so they know where to deposit the loan funds and possibly withdraw payments based on the terms of repayment.

Frequently asked questions

Are there unsecured personal loans for bad credit in Canada?

Some alternative lenders in Canada provide unsecured personal loans for people with bad credit. However, loans from these lenders typically come with higher interest rates and additional fees.

How to apply for an unsecured personal loan?

To apply for an unsecured loan you may be expected to fill out an application on the lender’s website or apply in person. Make sure you have all the required documents to ensure a quick outcome.

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