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. Unsecured lending can provide flexibility and quick access to funds when you need them, but it’s important to carefully consider the higher costs and your ability to make regular payments.

And while lenders can’t automatically seize property if you default, they 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.

How To Apply For a Personal Loan

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

• Initial application: Submit financial information including proof of income, employment history and other documentation showing your ability to repay

• Credit review: Lenders perform a hard credit check and evaluate your debt-to-income 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 670+ for best rates. Some accept 580-669 with higher rates

• Debt-to-income ratio: Most lenders prefer DTI below 40% (including the new loan)

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

• Employment history: Usually need 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.  General-purpose loans from banks, credit unions or online lenders. 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. However, 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?

When comparing secured vs unsecured loans, the main distinction lies in collateral requirements. Secured loans require you to pledge assets like your home or car (or a boat!), 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.

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 (like credit card balances), 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 (like medical bills or major car repairs) 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 (over $50,000)

• 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.