A Guide to Unsecured Personal Loans

By Janet Schaaf · December 21, 2023 · 7 minute read

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A Guide to Unsecured Personal Loans

Unsecured personal loans are loans provided by banks, credit unions, and online lenders that do not require any type of collateral. They provide an opportunity to borrow funds without putting any of your assets (like your home or car) at risk. The funds can be used for virtually any purpose, including debt consolidation, home improvements, and large purchases.

How do you know if an unsecured personal loan is the right choice for you? We’ll dive into exactly what an unsecured personal loan is, the benefits of an unsecured personal loan, and how to choose the best loan for your situation.

What Is an Unsecured Loan?

An unsecured loan is a loan that is not backed by collateral, such as your home, bank account balances, or vehicle. To have a loan “backed” by an asset means that a bank or lender has the right to take that asset in the event of default on the loan.

Loans backed by collateral (such as mortgages, home equity loans, and auto loans) generally pose less risk to lenders — if the borrower defaults, they can recoup the balance due by seizing the collateralized property. Because unsecured loans pose a higher risk, they tend to have higher interest rates and come in lower loan amounts compared to secured loans.

Some borrowers, however, prefer unsecured loans, since they don’t require you to put your home, car, or other personal assets at risk. You qualify for an unsecured personal loan strictly on your ability to repay the borrowed amount. Lenders assess this by looking at your income, credit scores, and borrowing history.

💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

What Are Common Uses for Unsecured Personal Loans?

Unsecured personal loans can be used for a wide array of purposes. Here are some of the most common reasons why people take out unsecured personal loans.

Credit Card Payoff

Credit cards tend to have high annual percentage rates (APRs). Currently, the average credit card interest rate is 28.02%. Personal loans, on the other hand, charge an average interest rate of 11.31 (if you have a high credit score, you may be able to get a lower APR).

Using a personal loan to pay off credit card debt can potentially help you save money on interest. You can get an estimate of the potential savings of using an unsecured personal loan to pay off a credit card balance by using a personal loan calculator.

Debt Consolidation

If you make many different credit card (or other debt) payments every month, it can be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you can get hit with late fees and your credit could be negatively affected.

Debt consolidation is the process of taking out an unsecured personal loan and using it to pay off multiple debts, leaving you with just one monthly payment. This simplifies repayment and, if you get a loan with a lower interest rate, could also help you save money.

Medical Expenses

Unsecured personal loans can be used to pay for a range of medical treatments, including elective procedures, fertility treatments, prescriptions, surgeries, dental procedures, and more.

A number of lenders, including certain banks, credit unions and online lenders, offer personal loans that can be used for medical expenses. Though interest expenses will add to the total cost of treatment, this can be a less expensive option than putting the medical expense on your credit card.

Home Projects

Whether you’re thinking about updating your kitchen or renovating a bathroom, you may be able to use an unsecured personal loan, also called a home improvement loan, to obtain funding for the project.

An unsecured personal loan can be especially useful if you need cash quickly for critical repairs or emergencies. It also provides an alternative to taking out a home equity loan or line of credit for remodeling or repairs, both of which are secured loans and require equity in your home.

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What Are Some Different Types of Unsecured Loans?

The most common types of unsecured loans include:

•   Personal loans Personal loans are typically unsecured, though some lenders offer secured options. Loan amounts range from $1,000 to $50,000, with repayment terms of two to seven years. Interest rates are typically fixed.

•   Personal lines of credit A personal line of credit is a revolving loan, which means the loan can be spent, repaid, and spent again, similar to a credit card. While some credit lines are secured, many lenders offer unsecured options. Personal credit lines typically have a variable interest rate.

•   Student loans Education loans are used to cover the cost of college tuition and expenses. Both federal and private student loans are unsecured. However, student loans usually carry more restrictions and payback instructions than other types of unsecured loans.

•   Credit cards Like a personal credit line, credit cards are a type of revolving loan that lets you access money up to a certain limit as you need it and only pay interest on the amount you borrow. While secured credit cards are available, most consumer cards do not require collateral.

Why Choose an Unsecured Personal Loan?

Here’s a look at some of the benefits of unsecured personal loans.

•   Fast processing time It often doesn’t take long to get the lump sum of money in your hands — often just a few days or so.

•   Consistent payments Personal loans are a type of installment loan, which means payments will be fixed and follow a set schedule.

•   Less costly than credit cards With good credit, interest rates on unsecured personal loans are typically lower than interest rates on credit cards.

•   Flexibility An unsecured personal loan can be used for almost any purpose, including credit card consolidation, a large purchase (like an appliance), a wedding, travel, medical expenses, home repairs, and more.

•   No collateral You don’t need to put anything of value at risk of repossession in order to secure the loan.

Applying for an Unsecured Personal Loan

Before you apply for an unsecured personal loan it’s a good idea to check your credit score, since it will play a role in your loan eligibility and interest rate.

Next, you’ll want to research and compare lenders, including banks, credit unions, and online lenders. It can be a good idea to compare loan amounts, interest rates, terms, and fees. Also check loan requirements, if they are available. Some lenders have a minimum credit score or income requirements.

In some cases, you may be able to pre-qualify for a personal loan, which lets you see the loan terms you may qualify for. This involves a soft credit check, which won’t impact your credit.

Once you find a loan you like, it’s time to officially apply. Often, you can do this online, though some lenders may require you to apply in person. Either way, you’ll need to provide personal and financial information (such as your name, home address, and employment information). In addition, you may need to provide the following documents:

•   State-issued ID

•   Proof of residence

•   Proof of income (like a bank statement or pay stub)

•   Tax return

Once you submit your application, you may receive a decision within a few minutes or a few days, depending on the lender.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

For some of life’s many curveballs — or opportunities — the occasional need for an unsecured personal loan might come up. Unlike a secured loan (like an auto loan, mortgage, or car title loan), an unsecured personal loan doesn’t require you to provide anything of value to guarantee it. You qualify based only on your ability to repay the borrowed amount to the lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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