What Is an Unsecured Personal Loan and How Does It Work?

An unsecured personal loan is when you borrow a lump sum of money from a lender without any collateral. You’re responsible for repaying the loan over a fixed period. Here’s how unsecured loans work, rates and potential alternatives so you can decide if it’s right for you.

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Quick Take

• An unsecured loan allows you to borrow money from a lender without providing collateral.

• The lender will charge an interest rate depending on your credit score and other factors.

• The term is usually from one to seven years.

• Loan amounts can vary from $1,000 to $50,000. Some individuals with high credit scores can secure amounts up to $100,000.

• It’s possible to get funding on the same day or the next business day.

How Do Unsecured Personal Loans Work?

Unsecured personal loans follow a simple structure with predictable payments and terms:

• Installment structure: You’re given a lump sum by the lender. Each month, you’ll repay the loan which includes the principal amount plus interest. Typically, this amount is fixed, and the term is usually between 12 and 84 months.

• Fixed repayment schedule: The fixed repayment schedule makes it convenient for the borrower in that the payments are predictable. Also, if you’re late, you don’t risk losing collateral.

Typical Personal Loan Rates by Credit Score

Interest rates for unsecured personal loans vary based on your credit score. Here’s what you can typically expect:

Unsecured vs. Secured Loans: What’s the Difference?

The difference between unsecured and secured loans is collateral. An unsecured loan doesn’t require collateral, while a secured loan does. Here’s a side-by-side look at the differences:

What Types of Unsecured Loans Are There?

Unsecured personal loans come in many types, including personal, student, medical, peer-to-peer (P2P) loans and credit cards. Here are the key features and what the different types are for.

What Do You Need to Qualify for an Unsecured Loan?

To qualify for an unsecured loan, you’ll need to meet a few basic requirements.

Eligibility Checklist

• Credit score: Some lenders will accept a credit score as low as 580, but the best rates are typically for credit scores higher than 670.

• Income verification: You’ll need to provide proof of income in the form of pay stubs or bank statements.

• DTI ratio: The ideal rate will be offered for those with DTIs less than 36%.

Documents You’ll Need

• Government-issued ID

• Pay stubs, tax returns and bank statements

• Employment details

• Social Security number

• Bank account information

• List of existing debt and income

Good To Know

Lenders use a simple formula to calculate your DTI ratio:

• Total monthly debt ÷ gross monthly income = DTI percentage

Can a Cosigner Help?

A cosigner can agree to help you with your loan. Keep in mind they’re responsible for payments on the loan, and if a default occurs, this shows up on your credit report and theirs.

How Do You Get an Unsecured Personal Loan?

If you're wondering how to get a personal loan that doesn't require collateral, you can follow these steps:

1. Check your credit score and history: Make sure your credit score is high enough to meet lenders' requirements. If you see any errors on your credit report, reach out to the credit bureaus to dispute them.

2. Compare lenders and prequalify if available: Prequalifying is a great way to get a sense of how much money a lender will offer you without having to do a hard pull of your credit, which will happen after you apply.

3. Gather documents: You'll need a variety of documents to prove you have income when you apply. These include ID, proof of income and employment info.

4. Apply online, in person, or at a bank or credit union: Online lenders typically approve and fund loans faster than brick-and-mortar locations.

5. Review terms, sign the agreement and receive funds: This could take anywhere from one day to several business days, depending on the lender.

Quick Example: What Does an Unsecured Loan Cost?

Here’s a simple example to give you a general idea of what an unsecured loan might cost:

If you borrow $10,000 at a 12% interest rate over 36 months, you could expect:

• Monthly payment: About $332

• Total interest paid: Around $1,950

Pros and Cons of Unsecured Personal Loans

Unsecured personal loans can be a flexible borrowing option, but they come with both benefits and trade-offs to consider:

Pros

• No risk of losing collateral.

• Fixed payments allow for budgeting.

• You can get same-day funding.

• Lower interest rates than credit cards.

Cons

• You could be charged origination fees.

• You need a relatively high credit score.

• If you have fair-to-bad credit, you may get an interest rate as high as 36%.

Is an Unsecured Personal Loan Right for You?

Whether an unsecured personal loan is right for you depends on your credit score and why you want to use the funds. You need to have a stable income and a plan for repayment before you decide to take on a personal loan.

Good Fit If:

• You have a credit score of 670 or more.

• You like the idea of a fixed payment plan.

• You’re consolidating high-interest debt.

Not Ideal If:

• Your credit score is under 600.

• You’re trying to fund a want and not a need.

• You qualify for a credit card with 0% interest.

• You don’t have consistent income.

What If You Don’t Qualify? Alternatives To Know

If you decide an unsecured personal loan isn't right for you or aren't able to qualify for one, consider one of these alternatives.

Secured Loans

Secured loans are a good option if your credit score isn't high enough to get an unsecured loan. Plus, you may be able to get a lower interest rate in exchange for putting up collateral.

Home Equity Line of Credit (HELOC)

HELOCs are revolving lines of credit that you can borrow against, similar to how credit cards work. They are secured because your home is considered collateral.

Credit Builder Loans

If your credit score needs improving or you're just getting started with credit, a credit builder loan is an option worth considering. With this loan, you make fixed payments to a lender and get access to the funds after you've made all payments.

Since you get the money only after paying for the loan in full, there's no risk to the lender. In addition, payment history is reported to the credit bureaus, which can improve your credit score and help you qualify for other types of loans.

Key Takeaways

• You should have a clear purpose of why you need funds for an unsecured personal loan.

• A credit score of 670 or above will allow you to get a better interest rate.

• A steady income can help you pay off your unsecured loan, since payment amounts are predictable month to month.

• There’s no risk of losing collateral with an unsecured personal loan.

Unsecured Personal Loan FAQs

What is an unsecured personal loan?

An unsecured personal loan is an amount you borrow from a lender. You aren’t required to provide collateral and will have to repay the loan in fixed installments over a set period.

What credit score do I need?

Ideally, you need a credit score of 670 or above, but there are lenders that will fund unsecured personal loans with credit scores that range from 590 to 669.

How fast can I get approved?

You can get approval within the same day, and depending on the lender, funding can happen between one and three business days.

Do unsecured loans hurt your credit?

A hard inquiry on your credit can result in a small dip. However, timely payments can help your credit score.

Can I get one with bad credit?

You can get an unsecured loan with bad credit, but you'll pay a higher interest rate.

What’s the easiest unsecured loan to get?

Online loans and payday loans are typically easier to get.

Sarah Silbert contributed to the reporting for this article.

Photo credit: SDI Productions / Getty Images