When you’re planning a wedding, a vacation or a home renovation, you might need an infusion of cash to cover your expenses. The right kind of loan could offer an ideal solution: Some loans require you to use an asset – like your home or car – as collateral. These are secured loans, meaning the lender can claim the asset if you don’t repay. If you prefer not to risk your valuable assets, you could instead consider an unsecured personal loan.
In this guide, we’ll explain more about what unsecured loans are, the most common types, how to use them and what to consider before applying for one.
Key Takeaways:
- An unsecured loan does not require collateral but may involve stricter credit requirements and higher interest rates.
- Personal loans, student loans and credit cards are all types of unsecured loans.
- Unsecured personal loans can be used to consolidate debt, make home improvements or pay for major family events or even medical expenses.
- Lenders will evaluate your credit history and score, your income and your debt-to-income ratio (DTI) before offering you an unsecured loan.
What Is An Unsecured Loan?
An unsecured loan is a type of financing that does not require borrowers to use collateral, such as their car or home, to secure it. Instead, lenders approve unsecured loans based primarily on the borrower’s creditworthiness and debt-to-income ratio.
Common Types of Unsecured Loans:
- Personal loans: Personal loans are typically distributed as a lump sum with a fixed interest rate and predictable monthly payments. Borrowers with good or excellent credit scores (typically 670 – 740+) usually qualify for the best rates.
- Student loans: These are designed to cover education-related expenses such as tuition, housing and textbooks. Federal student loans have fixed interest rates, while private student loans may offer either fixed or variable rates.
- Credit cards: These provide a revolving line of credit for everyday expenses, but you’ll likely pay a higher, variable interest rate.
How Borrowers Use Unsecured Loans
One of the biggest advantages of unsecured loans is the flexibility they provide. These funds can generally be used for almost any purpose. Common applications include:
- Debt consolidation
- Medical expenses
- Home improvement projects
- Car repairs or maintenance
- Vacations
- Wedding expenses
- Moving or relocation costs
- Business expenses
Unsecured personal loans are typically available in amounts ranging from $5,000 to $15,000, with a maximum of $45,000 (or more in rarer cases), although approval and loan size will depend on the borrower’s financial profile.
Next, we’ll take a closer look at how unsecured personal loans work and the factors that influence approval and terms.
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How Unsecured Personal Loans Work
Unsecured personal loans – sometimes also called signature loans – are a common type of unsecured loan.
Most personal loan terms typically range from 1 to 5 years, though some lenders may offer up to 10 years. Because lenders offering unsecured loans get no collateral from which to recover potential losses, these loans typically have shorter repayment terms, along with stricter qualifications and higher interest rates, than secured personal loans. According to Federal Reserve data, the average interest rate for a 36-month personal loan from commercial banks is typically around the low teens, though rates vary widely by borrower credit profile.
To apply for an unsecured personal loan, you’ll need to complete an application and await lender approval. Once approved, you’ll receive details about your loan amount, interest rate and repayment schedule. Depending on your lender and the type of unsecured loan, the funds may be disbursed as a lump sum via direct deposit, sometimes even on the same day you’re approved or within a few business days. Interest begins accruing once the loan funds are disbursed.
If you want to improve and strengthen your credit score and history, making recurring, on-time payments will help. Missing payments or defaulting on the loan will have the opposite effect, negatively impacting your credit score and reflecting poorly on your credit history.
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Unsecured Loans Versus Secured Loans
Secured Loans
The terms of a secured loan require you to provide collateral to secure your loan: This protects the lender in the event of default. If you cannot repay the money, the lender can legally take possession of the collateral as payment.
Since they are secured by collateral, these loans often have lower interest rates and less stringent credit requirements than unsecured ones. Mortgage loans, including home equity loans and home equity lines of credit (HELOCs), are forms of secured loans. For some perspective, as of December 2025, the national average interest rates for 5-year home equity loans, according to the National Credit Union Administration, were 6.63% at credit unions and 7.31% at banks.
Unsecured Loans
Unsecured loans, which include personal loans, do not use collateral, but you must have sufficient credit and a good DTI to qualify for one. Lenders set the terms and requirements; usually, the higher your credit score, the more money you may be approved to borrow and the lower your interest rate on the loan might be.
If you qualify for an unsecured loan with lower credit, you may be limited in the amount you can borrow, and your loan could carry a higher interest rate. Overall, unsecured loans generally have higher interest rates than secured ones.
Pros And Cons Of Unsecured Personal Loans
An unsecured personal loan offers many benefits, but what about the drawbacks? Here are some of the biggest advantages and disadvantages of this loan type.
| Pros | Cons |
|---|---|
| No collateral required | Origination fees are sometimes as high as 10% |
| Typically fixed interest rates | Higher interest rates |
| Lump-sum amount and, in some cases, same-day funding | Shorter payback period |
| Convenient and quick application process | Harder to qualify for |
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How To Apply For An Unsecured Personal Loan
Step 1: Research Lenders
Research lenders to find the best fit for your financial profile. As with any major financial decision, it’s essential to consider all your options when selecting a lender. Financial experts recommend staying clear of payday loans, which often carry extremely high fees and are restricted or banned in some states. The safest way to get an unsecured personal loan is through banks, credit unions or reputable online lenders.
Step 2: Determine Your Loan Amount
Consider how much money you need and how much you can realistically afford to borrow. Keep in mind when budgeting that you’ll be paying back the loan amount plus interest.
Step 3: Understand The Full Cost Of Borrowing
Interest accrues over time, so you will always pay back more than the lump sum you borrowed. To fully understand what you’ll owe on your loan, calculate all potential fees, including origination fees, late payment fees and other associated penalties. Add all these potential costs together. Understanding (and planning for) the real cost of a loan up front can help you make a smarter borrowing decision.
Step 4: Apply For The Loan
Gather your paperwork for your application and send everything to your lender of choice, either online or in person.
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Unsecured Personal Loan Qualifications
Approval typically depends on credit score, income and DTI requirements. You’ll typically need a minimum credit score of around 640 and a DTI below 36%, but exact requirements will vary by lender.
In addition, be prepared to provide your lender with the following personal information:
- Proof of identity (such as a driver’s license)
- Proof of current address (such as a utility bill)
- Proof of income (such as pay stubs or bank statements)
- Social Security number
- Date of birth
If you have a somewhat low credit score, your lender may also require a co-signer before granting loan approval. Without a co-signer, you may need to consider another option, such as a secured personal loan.
Alternatives To Unsecured Personal Loans
If an unsecured personal loan doesn’t meet your needs, consider other options:
- 0% APR credit card: Certain credit cards will offer an incentive of 0% APR for a limited time. Consider opening a new card to fund your big purchase, and then pay it off interest-free before the 0% APR promotion ends (after which the interest rate may rise significantly). Keep in mind that you also may need to pay a balance transfer fee.
- Home equity line of credit (HELOC): If you have a decent amount of equity in your home, this type of revolving credit might be suitable for your situation. Many lenders require homeowners to retain 20% equity after borrowing. HELOC funds can be used for home improvements, large purchases, education costs or even debt consolidation. Depending on how much equity you have, you may be able to take out more money at a lower cost than you’d pay with an unsecured personal loan.
- Home equity loan: Similar to a HELOC, a home equity loan is a secured loan that uses the available equity in your home as collateral. Unlike a HELOC, however, the funds are dispersed in a lump sum, and you’ll be required to make a fixed monthly payment for the terms of the loan, anywhere from 5 – 30 years. You can use an online home equity calculator to determine how much you have available.
FAQ
The Bottom Line: Unsecured Loans Give You Access To Cash Without Collateral
Unsecured loans can help you access cash when you need it using a convenient and typically fast funding process – without the need for putting up collateral.
Most unsecured personal loans have fixed interest rates and monthly payment amounts, which can help you stick to your household budget and plan for the future without any surprises. You can use funds from an unsecured personal loan for nearly anything, including home improvements, education expenses or debt consolidation.
If you have strong credit, a low DTI and the ability to comfortably make payments, an unsecured loan can provide quick access to funds right when you need them.
Learn more about personal loans to help you decide if this loan option is the right choice for you.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
