Unsecured Loans

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What is an unsecured loan?

An unsecured loan is issued mostly on a borrower’s creditworthiness, as opposed to a secured loan, which requires some form of collateral, such as a home, vehicle or savings account. Unsecured loans include most personal loans and student loans, while common examples of secured loans include mortgages and car loans. You don’t necessarily need a high credit score to qualify for an unsecured loan, but borrowers who have the highest credit ratings generally get the best interest rates and terms.

Is an unsecured loan right for you?

Depending on your financial needs, personal assets and credit history, an unsecured loan might be the right option for you. Unsecured loans involve borrowing money without having to put up the collateral needed for a secured loan. The advantage of a no-collateral loan is that you avoid the risk of repossession if you don’t make loan payments.

As you might expect, unsecured loans are considerably riskier for lenders, especially for borrowers with subpar credit. Such borrowers can expect to pay higher — and in some cases much higher — interest rates. Still, lenders will most likely consider other factors as well, such as your income and debt-to-income ratio, or how much debt you have relative to income.

The terms on unsecured loans have typical lengths of two to five years, while the total loan amounts often range from $1,000 to $50,000. Unsecured loans can also be used for almost anything — for business loans, home improvement projects and covering medical bills, as well as for consolidating debt (popular with personal loans) and even paying for big-ticket purchases, such as a major vacation.

Who should consider an unsecured personal loan?

Consumers who need money quickly might want to consider an unsecured personal loan. This is because the application and approval process tends to be fast, sometimes taking just a few hours. Access to funds is typically quick, too, often within a matter of days following loan approval.

Personal loan proceeds can be used to pay for almost anything, including the following:

  • Business expenses
  • Home improvement projects
  • Debt consolidation
  • Credit card refinancing
  • Vehicle purchases
  • Medical expenses
  • Moving expenses
  • Vacations
  • Wedding expenses

Advantages of unsecured loans

  • The approval process is quick: With unsecured loans, you may be able to access your funds within a day or two of being approved.
  • Unsecured loans aren’t backed by collateral: Unlike secured loans, unsecured loans don’t require collateral as backup. For example, a mortgage requires a home as collateral and an auto loan requires a vehicle for the same reason. If you default on an unsecured loan, nothing will be repossessed.
  • Rates are fixed. Unlike other forms of credit, such as credit cards, which have variable interest rates, unsecured personal loans usually have fixed interest rates. This means your monthly payments will be consistent and predictable.
  • Unsecured loans can be discharged in bankruptcy: If you experience an unexpected financial disaster — and earn no more than your state’s median income — you may be able to discharge the debt on an unsecured loan if you need to file for Chapter 7 bankruptcy. After bankruptcy, you might also be able to use an unsecured loan to help rebuild your credit.

How to qualify for an unsecured personal loan?

  • Make sure your credit is in good standing. This type of loan is not backed by anything other than a borrower’s promise to repay, so an applicant’s credit history and scores are extremely important. As you’ll see in the chart below, the difference in interest rates offered to consumers who have good credit versus those who do not can be vast, and rates for low-credit consumers can be exceptionally expensive.
  • Consider using a cosigner. If you have less-than-ideal credit, lenders might be more willing to work with you (as well as offer better loan terms) if you have a loan cosigner.
  • Fill out an online application and get your documents in order. Applicants for unsecured loans must complete an application and authorize a credit check. You’ll also need to provide documentation showing you have sufficient income to repay the new loan — usually pay stubs and W-2 forms, or tax returns if you’re self-employed.
  • Get approved. In many cases, consumers can complete the application online, then receive their funds directly in their bank accounts.

Get Your Personalized Rate

Shopping for unsecured loans

Interest rates for these loans vary widely, so it makes sense to get quotes from several competing lenders before making a commitment. To simplify the process, you may also consider filling out an online form through LendingTree to get up to five loan offers from partner lenders, depending on your creditworthiness.

When shopping for the best unsecured personal loan, compare the interest rate, fees and APR. It’s also important to look out for certain conditions, such as prepayment penalties, and double check the loan’s terms and payment schedule before signing.

It’s possible to get an unsecured personal loan from several different institutions, including:

  • Banks
  • Credit unions
  • Online financial service companies, such as Lightstream and Payoff
  • Peer-to-peer (P2P) lenders that connect borrowers with investors, such as LendingClub

Unsecured personal loans with bad credit

Most unsecured personal loan lenders require borrowers to have good credit, generally defined as a credit score of 670 or above. Your chances of getting a loan will be much lower if you have a score less than 670, a history of missed payments, debt collections or charge-offs by lenders for debt you were unable to pay.

If you have poor credit, you may still be able to find a reputable provider for a personal unsecured loan. And even if you’re a subprime applicant, some lenders may be willing to loan money if you have a cosigner.

However, you should be on the lookout for lenders advertising unsecured loans for bad credit or unsecured loans with no credit check — these aren’t standard personal loans. Most likely they are payday loans, check advance loans, or car title loans; these all typically come with very short terms and very high-interest rates. Payday loans are often advertised on storefronts or online. But, according to the Federal Reserve Bank of St. Louis, the average payday loan recently carried an extremely high-interest rate of nearly 400%.

Unsecured loan interest rates

Interest rates on unsecured personal loans can vary dramatically according to the lender’s policies and the credit rating of the borrower. According to LendingTree data, average rates for unsecured personal loans in the fourth quarter of 2019 were as follows:

Credit Score Range Average APR
720+ 7.63
680-719 11.88
660-679 18.53
640-659 26.15
620-639 38.64
580-619 65.70
560-579 105.39
Less than 560 113.62

What is the difference between secured and unsecured personal loans?

Unsecured personal loans
  • Do not require putting property or assets up as collateral, so if you default, nothing will be seized
  • Often require a higher credit score and carry higher interest rates
  • Typically have lower borrowing limits
  • Are approved based largely on creditworthiness, but solid income and a good debt-to-income (DTI) ratio are also considered
  • Include most personal loans, student loans and credit card debt
Secured Personal Loans
  • Require property or assets as collateral, which could be seized if you default
  • Offer higher loan limits
  • Are easier to obtain than unsecured loans because the lender takes on less risk if you default
  • Typically include car loans, mortgages, home equity loans and home equity lines of credit

FAQ: Unsecured loans

Unsecured debt is debt that isn’t backed by a form of collateral. For example, credit card debt is unsecured debt — if you default, nothing is seized. Mortgage debt, on the other hand, is secured debt. If you default, you could lose your home.

Personal loans can be both. Many personal loans, such as student loans, are unsecured, with no collateral required. Secured personal loans, on the other hand, require some kind of collateral, such as a car for a car loan. In some cases, a lender might also be willing to accept another type of collateral, such as a cash deposit, certificate of deposit (CD) or savings account. For borrowers, that can get risky; it means a lender will likely put a hold on your account until the debt is paid off.

Outside of personal loans, other types of unsecured loans include student loans, payday loans and many personal lines of credit.

If you default on an unsecured personal loan, your credit score will take a major hit. Lenders might sell your debt to a third-party collection agency in an attempt to recover some of it, alert credit bureaus to the default or take you to court. All three actions could negatively impact your credit for years.

Start by visiting LendingTree’s online marketplace, which compares different lenders. Popular online lenders for unsecured personal loans include Lightstream, Payoff, Upgrade, SoFi and LendingPoint.

Some payday and title lenders will advertise unsecured personal loans with guaranteed approval. This is a risky path to take, as payday and title loans come with short terms and often exceptionally high interest rates, and some lenders may be predatory. It’s usually best to avoid unsecured personal loans that promise guaranteed approval.

Lenders that advertise “unsecured loans no credit check” are likely the same lenders that promise guaranteed approval. This means they’ll have similar drawbacks — loans with short terms, high interest rates and potentially predatory behavior.