What Is an Unsecured Loan? Everything You Need To Know

An unsecured loan is a way to finance an expense without putting up an asset as collateral. While it's a quick and flexible option, it’s important to carefully consider the higher interest costs and your ability to make regular payments.

And while lenders can’t automatically seize property if you default, they can report your missed payments to the credit bureaus and pursue collections against you.

MoneyLion can help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Key Takeaways

• An unsecured loan lets you borrow money without putting up collateral like a home or car. Approval is based on your creditworthiness, including your credit score, income and debt-to-income (DTI) ratio, rather than the value of an asset.

• Unsecured loans typically come with higher interest rates than secured loans. Because lenders take on more risk without collateral backing the loan, borrowers, especially those with lower credit scores, can expect higher borrowing costs.

• Personal loans, student loans and credit cards are among the most common types of unsecured loans. Each serves a different purpose, but all share the same core feature: no collateral required.

• Defaulting on an unsecured loan won't cost you an asset, but it can seriously damage your credit. Lenders can report missed payments to credit bureaus and pursue collections or legal action against you.

Summary generated by AI, verified by MoneyLion editors

How To Apply For a Personal Loan

Although the process can look different depending on different lenders, here’s what you can generally expect:

• Get prequalified: This allows you to see what rates you'll be offered without a credit check. You'll have to fill out an application and provide information about your income and other debts.

• Credit review: Lenders perform a hard credit check and evaluate your DTI ratio.

• Loan terms: If approved, you receive an offer specifying interest rate, loan term and monthly payments.

• Fund disbursement: Money typically appears in your bank account within a few business days.

How To Qualify For an Unsecured Loan

Here’s what lenders typically look for when they're reviewing applications:

• Credit score: Most lenders look for scores of 670 of higher for best rates.

• DTI ratio: Most lenders prefer DTI below 40%.

• Income: Stable, verifiable income that comfortably covers loan payments

• Employment history: Usually need at least 2 years of steady employment

• Bank account: Active checking account for loan disbursement and payments

What Types of Loans Are Unsecured?

Here are the most common types of unsecured loans you’ll encounter:

Personal Loans

• Personal loans are one of the most common types of unsecured loans. 

• These flexible loans can be used for various purposes, from debt consolidation to home improvements.

Student Loans

• Government or private loans specifically for education expenses, including tuition, books and living costs.

• Federal student loans often the most more flexible repayment terms and lower interest rates.

Credit Cards

• Credit cards offer revolving unsecured credit, letting you borrow up to your limit and repay over time.

• They’re perfect for everyday purchases and building credit when used responsibly.

• They can also come with higher interest rates than other unsecured loans.

MoneyLion can help you explore a wide variety of credit card options tailored to different needs and preferences.

What Is the Difference Between a Secured and Unsecured Loan?

The main distinction lies in collateral requirements. Secured loans require you to pledge assets like your home or car, while unsecured loans rely solely on your creditworthiness.

Putting up collateral can often help you score lower interest rates and get approved with a lower credit score.

Pros and Cons of Unsecured Loans

Who Should Get an Unsecured Loan?

Unsecured loans can be a good financial solution for certain situations and borrowers. Here’s who might benefit most:

• Good credit score holders: People with credit scores above 670 are ideal candidates since they’ll typically qualify for the best interest rates and terms, making the loan more affordable.

• Debt consolidators: If you’re juggling multiple high-interest debts, an unsecured loan could help simplify payments and potentially lower your overall interest rate.

• Short-term goal achievers: Those who need a specific amount of money for a clear purpose — like home renovations or wedding expenses — and have a solid plan to repay the loan within a few years.

• Emergency expense handlers: People facing unexpected costs who don’t have adequate savings but do have steady income to handle monthly payments.

Who should think twice:

• Those with poor credit scores, as interest rates may be high

• People without stable income to make regular monthly payments

• Anyone who could qualify for a lower-interest secured loan instead

• Those who need very large loan amounts

• People already struggling with existing debt payments

FAQs

What is an unsecured personal loan?

An unsecured personal loan is a type of borrowing that provides funds based solely on your creditworthiness, without requiring any collateral like a house or car as security for the loan.

What is an example of an unsecured loan?

A credit card is the most common example of an unsecured loan, where you’re given a credit limit based on your credit history and income, without putting up any assets as collateral.

Which loan is better, secured or unsecured?

While secured loans typically offer lower interest rates and higher borrowing amounts, unsecured loans might be better if you don’t want to risk losing assets or don’t have collateral to offer.

Can I get an unsecured loan with bad credit?

While it’s possible to get an unsecured loan with bad credit, you’ll likely face much higher interest rates and may need a co-signer. Consider improving your credit score first or checking out secured loan options.

Key Terms

• Collateral: An asset such as a home or car that a borrower pledges to secure a loan. Unsecured loans do not require collateral, which means lenders rely on creditworthiness alone to approve borrowers.

• DTI ratio: The percentage of your gross monthly income that goes toward existing debt payments. Most lenders prefer a DTI below 40% when evaluating unsecured loan applications.

• Credit score: A numerical rating that reflects your borrowing history and likelihood of repaying debt. A score of 670 or higher typically qualifies borrowers for the most competitive unsecured loan rates.

• Revolving credit: A type of credit, such as a credit card, that lets you borrow up to a set limit, repay it and borrow again. It differs from installment loans, which are repaid in fixed payments over a set term.

• Default: Failure to repay a loan according to its agreed terms. Defaulting on an unsecured loan can result in collections, legal action and significant damage to your credit score.

Summary generated by AI, verified by MoneyLion editors

Sources

• Federal Student Aid. "When it comes to paying for college, career school, or graduate school, federal student loans can offer several advantages over private student loans."

• Consumer Financial Protection Bureau. 2023. "What is a debt-to-income ratio?"