What Is an Unsecured Personal Loan?

An unsecured personal loan is a type of money loan that doesn't require collateral.

That means you don't have to pledge an asset like a car or home to secure the loan. Instead, the lender evaluates your creditworthiness to determine whether to approve you for the loan as well as the terms of the loan. This structure makes unsecured loans an attractive choice for borrowers who want to access funds without risking personal assets.

Let’s dig deeper into how unsecured personal loans work, their potential benefits and drawbacks, and how they stack up against other types of financing.

How unsecured personal loans work

Unsecured loans are available from different types of lenders including banks, credit unions, and private lenders. Some online lenders even allow you to complete the entire application process online without ever having to visit a physical location.

As mentioned, approval for these loans primarily hinges on your creditworthiness — which is basically a measure of your financial stability, responsibility and credit history.

Lenders usually review factors like your credit score, income, and debt-to-income ratio, to determine if you’re a reliable borrower and therefore, whether to give you a loan. The more positive these factors are — e.g. the higher your credit score and the more stable your income source — the greater your chances of securing loan approval.

Loan amounts typically range from several hundred dollars up to $100,000 or more, with repayment terms of between 6 months and several years. Note that these ranges are not fixed — Always confirm the specifics with your chosen provider before proceeding. Meanwhile, interest rates on unsecured loans vary based on the lender’s specific rates and the borrower’s credit profile. Borrowers with higher credit scores generally enjoy more favorable rates.

Most unsecured personal loans have fixed rates, though there are some lenders that offer variable-rate loans.

Best uses for unsecured personal loans

Unsecured personal loans provide a flexible funding option for a range of personal needs. Here are some common use cases for this category of loans.

Debt consolidation: If you’re currently juggling several high-interest debts, you can use an unsecured loan to consolidate them into one single lower-interest debt. This not only simplifies your payments but could also potentially save you a fortune on interest.
Home improvements: An unsecured loan provides you with cash to fund various home improvement projects including kitchen remodels or bathroom upgrades.
Emergency expenses: Life can throw unexpected curveballs, such as medical emergencies or car repairs. An unsecured personal loan can offer quick access to funds to cover these unforeseen expenses.
Large expenses: Maybe you’re considering making a big purchase like a new refrigerator or TV. Or perhaps you’re planning a dream wedding or vacation, but haven’t built enough savings. An unsecured personal loan can help you cover these costs.

Pros and cons of unsecured loans

Unsecured personal loans offer both advantages and drawbacks that you should carefully weigh before you apply for one.

Pros

No collateral required: Since unsecured loans do not require collateral, there’s no risk of losing personal property in case you default. That doesn’t mean you shouldn’t make the maximum effort to repay, however. Defaulting on your payments can harm your credit score, and thus impact your ability to qualify for other financial products in the future.
Quick approval process: The approval process for unsecured loans can be very quick depending on the lender. Some lenders even offer same-day funding.
Flexible use: You can use unsecured loans for a wide range of purposes, from debt consolidation to home improvements and major purchases.

Cons

Higher interest rates: Because there’s no collateral, lenders face more risk when offering unsecured personal loans. Therefore, these loans often come with relatively higher interest rates than their secured counterparts.
Lower borrowing limits: Unsecured loans typically have lower borrower limits than similar loans that are secured. This can limit borrowers seeking higher financing amounts.
Stricter credit score requirements: Lenders often require a good credit score to approve an unsecured personal loan. Borrowers with lower credit scores may face higher interest rates or may not qualify for a loan at all.

How to qualify for an unsecured personal loan

To qualify for an unsecured personal loan, you’ll generally need to meet the following criteria.

Credit score: Most unsecured loan lenders look for a good to excellent credit score, typically a FICO score of 670 and higher. You could still qualify with a lower score, but you might not get the best rates.
Income verification: Lenders want to make sure you have a stable income source to support loan repayment. So, as part of your application, you’ll typically need to provide proof of employment and income, such as pay stubs or tax returns, to verify your ability to repay the loan.

Debt-to-come ratio: Your debt-to-income ratio is the proportion of your monthly gross income that goes towards repayment of debt. A lower debt-to-income ratio indicates a better ability to manage debt, which makes you a more attractive candidate for a loan.

Alternatives to unsecured loans

If an unsecured personal loan doesn’t seem like the best fit, here are a few alternative options to consider:

Secured personal loans: These are loans that require you to put up collateral, such as a car or home. This often results in lower interest rates, but it puts your assets at risk if you fail to repay the loan.
Credit cards: Credit cards also provide quick access to funds and work well for smaller, ongoing expenses. They’re especially advantageous if you can repay your balance in full every month, which allows you to avoid interest charges entirely. However, if you only make minimum payments or carry a balance, credit cards can quickly become costly.

Home equity loan: A home equity loan is a loan that’s secured by the equity in your home. These loans offer lower interest rates than unsecured personal loans. However, this option comes with the risk of losing your home if you default.

Unsecured personal loan vs other loan types

Here’s a look at how unsecured personal loans compare to other loan types.

Loan type	Collateral required	Interest rates	Typical loan amounts	Terms
Unsecured personal loan	No	Moderate to high	Up to $100,000	Flexible (1-5 years)
Secured loan	Yes	Lower than unsecured loans	Up to $100,000	Flexible (2-7 years)
Credit card	No	High	Varies but typically $500 to 30,000	Ongoing
Payday loan	No	Extremely high	$100 - $1,000	2-4 weeks
Home equity loan	Yes	Low	Usually up to 80% of the home’s value	5-30 years

How to compare unsecured personal loans

Selecting the best unsecured personal loans involves comparing several key factors to find the most favorable terms. Here are some of the most important factors to pay attention to.

Interest rates: Interest rates can vary significantly among lenders. Take the time to explore multiple offers comparing interest rates along with terms and fees.
Fees: Some loans come with additional costs, such as origination fees, prepayment penalties, or late fees. Be sure to read the fine print carefully to uncover any hidden charges that could affect the overall cost of the loan.
Loan terms: Examine the terms of the loans, including the loan duration, whether the interest rate is fixed or variable, and the loan amount. Choose terms that fit comfortably within your budget and financial goals. For example, a longer repayment term may result in lower monthly payments, but you could end up paying more in interest over time. A fixed-rate means steady monthly payments, which is easier for budgeting purposes. The downside is that you could be stuck with a high rate if you secure the loan during a period of high interest and rates subsequently decrease.
Lender reputation: While there are many reputable loan companies out there, there are also a lot of scams, so make sure to do your due diligence. Search the company online for reviews from customers who have interacted with it. Additionally, check its rating with organizations like the Better Business Bureau (BBB). If you can’t find any info about the company online, it's best to stay away from it.

Final thoughts: What is an unsecured personal loan?

Unsecured personal loans offer a flexible and convenient way to access funds for various needs — from consolidation debt to managing unexpected expenses to funding major purchases.

The primary advantage of these loans is you don’t have to put up any collateral, so there’s no risk of losing your personal assets in the event of a default. However, the tradeoff is typically higher interest rates compared to secured options, since lenders assume greater risk.

Carefully weigh the pros and cons and compare these loans with the other options we’ve explored to determine if this solution is right for you.

If you conclude that unsecured loans are a good fit, RISE Credit provides a fast decision process and flexible terms designed to meet your financial needs, without the need to provide collateral.

Explore RISE Credit’s unsecured personal loans today to find out how we can support your financial goals with responsible borrowing options tailored to your specific needs.

The content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.