What is an unsecured loan?

Unsecured loans are offered by banks, credit unions and online lenders. Unlike secured loans, they’re not backed by collateral and may be harder to get approved for than a secured option. However, they come with less risk as you won’t need to worry about your assets being seized should you fail to make the payments.

Most installment loans are unsecured. This includes student loans, personal loans and revolving credit such as credit cards. Eligibility will vary from lender to lender, but you’ll generally need good or excellent credit and a steady source of income to qualify.

The most creditworthy borrowers are more likely to be offered the best loan terms and lowest interest rates. You can generally use an unsecured loan for nearly every legal expense.

What is an unsecured loan?

Unsecured loans are loans that don’t require collateral. They’re also referred to as signature loans because a signature is all that’s needed if you meet the lender’s borrowing requirements. Because lenders take on more risk when loans aren’t backed by collateral, they often charge higher interest rates and require good or excellent credit to get approved.

Secured loans differ from unsecured loans in that secured loans require collateral. The lender won’t approve a secured loan if a borrower doesn’t agree to provide an asset as insurance.

Unsecured loans are available as revolving debt — a credit card — or an installment loan, like a personal or student loan. Installment loans require you to pay back the total balance in fixed, monthly installments over a set period.

Credit cards allow you to use what you need when you need it. They often have higher interest rates than loans. If you miss a monthly payment, you’ll be charged interest on top of the principal amount.

Who should get an unsecured loan?

Borrowers who need money but aren’t comfortable pledging collateral to secure a loan can consider applying for an unsecured loan when:

• Planning for a large purchase. Taking on debt can strain your finances, but if you need funds for a big upcoming expense, an unsecured loan can help.
• They have good credit. A high credit score unlocks more favorable unsecured loan terms and interest rates.
• They have reliable income. Although collateral isn’t needed for an unsecured loan, you’ll need steady income to repay the debt and avoid defaulting on the loan. Unpaid secured loans can negatively affect your credit.
• Consolidating debt. Unsecured loans are useful as debt consolidation tools that can make debt repayment simpler. This strategy can also help borrowers save money if they qualify for lower interest rates.

Types of unsecured loans

There are several types of unsecured loans to choose from. However, the most popular options are personal loans, student loans and credit cards.

• Personal loans

  A personal loan can consolidate debt, finance a large purchase, expense an ongoing project or finance home renovations.

  There are personal loans available for nearly everything, including wedding loans, pet loans and holiday loans. Technically these are just unsecured personal loans (also called signature loans) in which the funds are to be exclusively used for related purchases. Personal loan interest rates are typically lower than credit card rates.

  • Loan amount: Around $1,000 to $50,000
  • Average interest rate:12.65 percent (as of June 11, 2025)
  • Repayment timeline: Anywhere from two to seven years

  Who a personal loan is best for: Good credit borrowers who know exactly how much funding they need.

   

• Student loans

  There are two types of student loans: federal and private student loans. Federal loans are the better choice for most borrowers because they carry much lower rates and are available to every student attending a participating college. Private lenders offer private student loans and can come with higher rates and more stringent eligibility requirements. These loans are best used when filling funding gaps, as they don’t come with the benefits and protections that federal loans offer.

  • Loan amount: Up to full cost of attendance (private loans only)
  • Average interest rate: Up to 17 percent (private loans), up to 8.05 percent (federal loans)
  • Repayment timeline: Anywhere from five to 20 years, but will vary for every borrower

  Who a student loan is best for: Upcoming and current post-secondary education students supplementing their need- or merit-based financial aid.

   

• Credit cards

  Credit cards are one of the most common financing options. They’re a revolving debt, so the funds are available whenever needed. You can borrow up to your credit limit, which is assigned by the lender, and can borrow up to that limit. You can use a credit card to consolidate debt, for everyday spending, or to fund a larger purchase or experience. However, rates can be high and interest adds up fast if you carry a balance.

  • Credit limit: Typically between $2,000 and $10,000
  • Average interest rate: 20.12 percent (as of June 4, 2025)
  • Repayment timeline: No specified timeline

  Who a credit card is best for: Individuals with healthy spending habits looking for a long-term revolving line of credit.

   

Pros and cons of unsecured loans

Unsecured loan options may be less risky than other loan types for certain borrowers, but not all. When taking out any long-term debt, making a fully educated decision is crucial to promoting financial health.

Pros of unsecured loans

• No collateral required.
• Fast access to funds.
• No risk of losing assets.
• Fewer borrowing restrictions.
• Competitive rates for those with strong credit.

Cons of unsecured loans

• Risk of losing assets.
• Might have lower borrowing limits for those with low credit scores.
• Might have higher interest rates for those with low credit scores.
• Harder to get approved.
• Has fewer borrowing options than secured loans.

Qualifications for an unsecured loan

To limit their risk, lenders want to be reasonably sure you can repay the loan. Lenders measure that risk by checking a few factors, so they may ask about the following information when you apply for an unsecured loan (and tailor the loan terms according to your answers):

• Your credit: Lenders check your credit reports to see how you’ve managed loans and credit cards in the past. Generally, they look for a history of responsible credit use (typically one or more years), on-time payments, low credit card balances and a mix of account types. They’ll also check your credit scores, which are calculated based on the information in your credit reports. Consumers with FICO credit scores around 700 or higher usually qualify for the best interest rates.
• Your income: Knowing you have the means to meet your financial obligations, including the loan payments, lowers the lender’s risk. The lender may ask to see proof of stable, sufficient income, such as a current pay stub.
• Your debt-to-income ratio: To calculate your debt-to-income ratio (DTI), add all your monthly debt payments and divide that total by your gross monthly income. Lenders use this number to measure your ability to repay a loan. The lower the ratio, the better. 
• Your assets: Although unsecured loans don’t require collateral, the lender may want to know you have savings. They know you’re less likely to miss loan payments when you’re prepared to cover financial emergencies.

Many lenders offer prequalification, so you can check if you qualify before formally applying for a loan. 

Bottom line

The main advantage of an unsecured loan is that you don’t have to pledge collateral. But if you default on the loan, you could still face serious consequences, like major damage to your credit. Plus, a lender could take you to court to garnish your wages.

Taking out an unsecured loan can be good if you plan to repay the debt. If you decide an unsecured loan is right, compare rates, terms, and fees from as many lenders as possible before applying.

Frequently asked questions

• Do unsecured loans hurt your credit score?

  As with any new loan application, applying for an unsecured loan means getting a hard credit inquiry from the lender. This can cause your credit score to temporarily drop by as many as 10 points, but if you make your loan payments on time, your credit score can go up in the long-term.

• What happens if you don’t pay your unsecured loans?

  If you are behind on payments, your credit score will be damaged. Missing multiple payments may put you in default on the loan. You may be pursued by debt collectors and the lender may sue you.

• How hard is it to get an unsecured loan?

  Anyone can apply for an unsecured loan, but those with reliable income, good credit and a low DTI will qualify for the best rates. Your ability to qualify for an unsecured loan will depend on how well you match up with a given lender’s qualification requirements.