Most installment loans, including student loans, personal loans, and revolving credit, like credit cards, are unsecured. Eligibility varies among lenders, but typically, you will need good-to-excellent credit (a FICO score of 670 or higher) and a stable income to qualify for the best rates. We'll cover how unsecured loans work, where you can find an unsecured loan, what types are available, and how to qualify.
How do unsecured loans work?
No collateral required
Lenders offering unsecured loans don't require you to pledge collateral to get approved. Instead, they review your credit, employment situation, income, debt, and other factors to determine the likelihood that you'll be able to repay the loan amount. They're also called “signature loans” because the loan is guaranteed by your signature, or promise to repay, as opposed to an asset serving as collateral.
Interest rates are based on income and credit
If you present a higher-than-average risk, you'll likely find it more difficult to get approved for an unsecured loan, and will have to pay a higher interest rate and possible fees if you are approved. Conversely, if you present very little risk, you may get approved easily with competitive rates and terms. Exceptions to this are federal student loans (rates are set, regardless of credit) and short-term BNPL loans.
The mechanics of how an unsecured loan works depends on the specific type you get. Generally, most are installment loans, which provide a lump sum of money that may be sent to you or the company you're buying a product or service from.
Related: How Do Personal Loans Work?
4 types of unsecured loans
1. Personal loans
Unsecured personal loans are installment loans that allow you to borrow a lump sum of money, which you can use to cover a range of personal expenses.
- Interest rates: Lenders communicate the cost of a personal loan via its annual percentage rate (APR). APR is the annualized cost of a loan's interest and any upfront fees. Interest rates and payments are typically fixed, meaning they won't change once you take out the loan. Depending on the lender and your financial profile, rates typically range between 7% and 36%.
- Loan purpose: There are few limits regarding what you can use a personal loan for. For example, many lenders offer loans for debt consolidation, home improvements, vacations, moving, weddings, and emergency costs.
- Funding times: Funding times are relatively quick, with some lenders offering same-day funding.
- Loan amounts: Loan amounts can range from $500 to over $50,000, depending on the lender and the loans' purpose
- Loan terms: Repayment periods often range from two to seven years, though this can vary by lender and the loan's purpose.
- Origination fees: Origination fees, when applicable, are taken out of the loan balance before you receive it, and can be up to 12% of the loan amount, depending on the lender.
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Good to know
Some lenders offer unsecured loans for bad credit (a FICO score below 580), but these generally have higher rates and origination fees. A secured personal loan may be a better option if you have bad credit.
2. Student loans
Student loans are also unsecured; both private and federal student loans are available. Similar to personal loans, they provide you with a lump sum upfront that you repay, plus interest, through payments over a set term. Federal student loans offer repayment perks like income-driven repayment plans and loan forgiveness.
- Interest rates: Private student loan interest rates depend on your credit score and financial profile. Federal student loans offer the same interest rate to all borrowers, regardless of credit score. Rates may be fixed or variable with either loan type. Private student loan rates range between around 4% APR and 18% APR, depending on whether the loan is fixed or variable. Federal student loan rates range between 6.53% and 9.08% for loans disbursed on or After July 1, 2024, and Before July 1, 2025, depending on the loan type.
- Loan purpose: Unlike personal loans, the proceeds of a student loan must be used to cover eligible costs associated with attending an approved higher education institution.
- Funding times:
- Loan amounts: Borrowing limits are typically much larger for private student loans, which may cap the amount you can borrow at the cost to attend your school. Federal student loan limits vary depending on your year in school and the type of loan.
- Loan terms: You could have up to 30 years to repay a student loan, depending on the lender and whether the loan is used to consolidate existing student loan debt. Many private student loan lenders offer repayment terms between 5 and 20 years.
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Keep in mind
If you have a federal student loan and refinance with a private lender, you will lose any federal benefits you may qualify for.
3. Credit cards
Unsecured credit cards provide a revolving credit line that you can use, pay off, and use again. If you carry a balance beyond a billing cycle, you'll be charged interest on the balance according to the card's APR.
- Interest rates: Most credit cards charge a variable interest rate, which can increase if interest rates rise. Plus, they also charge compound interest daily, as opposed to simple interest (on personal loans, for example). What this means is that if you carry a balance, you'll be charged interest on any interest charges you haven't paid off yet. The average credit card interest rate was 21.51% APR, according to the Federal Reserve, but APRs can run over 30%, especially if you don't have good credit.
- Loan purpose: Credit cards are the ultimate in flexibility and can be used for just about anything.
- Funding times: Instant.
- Loan amounts: The amount you can borrow with a credit card is determined by your credit limit. Credit cards typically have lower credit limits than the amount you can borrow with an installment loan like a personal loan.
- Loan terms: You're only required to make the minimum payment each month, which is usually a small percentage of your balance. But interest is often charged daily on your remaining balance, which is one reason why credit card balances can quickly accumulate if you don't pay them off each month.
If you're eligible for a 0% APR card, you could pay no interest on purchases for an introductory period and only a balance transfer fee (often 3% to 5%) on balance transfers. If you're able to pay off the balance before the 0% introductory period ends, you could save a lot in interest. Introductory periods can last up to 21 months or more.
Learn More: Personal Loan vs. Credit Card
4. BNPL loans
Buy now, pay later (BNPL) loans are installment loans that allow you to break up retail purchases over time. You may see these from companies like Affirm or Afterpay as you check out online.
- Interest rates: Typically, 0% for short-term loans paid in four installments over a period of 6 weeks. Longer loan terms may carry interest rates similar to personal loans.
- Loan purpose: Retail purchases.
- Funding times: Since funds are routed to the retailer, you can use BNPL to purchase a product the same day you apply.
- Loan amounts: Loan amounts are limited to the cost of the item you want to buy.
- Loan terms: In most cases, you can opt to split up a purchase into four biweekly, interest-free payments, or a longer payment plan with interest. If you need more than six weeks to pay off a purchase, compare BNPL rates with personal rates to make sure you're getting the best terms.
Notably, short-term BNPL loans may not be reported to the credit bureaus.
Warning
If you fail to make your payments on time, you may be subject to high late-payment fees, sometimes up to $30 or more.
Difference between secured and unsecured loans
The main differences between secured and unsecured loans are:
- Collateral requirement: A secured loan requires you to pledge collateral while an unsecured loan doesn't.
- Interest rates: Rates are often lower on secured loans like a mortgage or auto loan because the lender can recoup your collateral if you default.
- Time to fund: With secured loans, lenders have to appraise the fair market value of the asset you're pledging. The process could take weeks as opposed to days or even same-day funding for some unsecured loans.
- Qualification criteria: Lenders may be more willing to make a loan to you or lower your rate when you put an asset on the line. If you don't have good credit, a secured loan could be easier to qualify for. Eligibility requirements for unsecured loans are often more strict.
For example, when you take out a mortgage, mortgage lenders use the home you're buying as collateral. They need to appraise the home in order to know how much to lend, so the process can take more than a month. However, you'll likely have a lower interest rate compared to an unsecured loan, like a personal loan. But if you miss payments and the loan goes into default, the lender can foreclose on your home and sell it to recover what you owe.
On the other hand, with unsecured personal loans, you don't need to pledge any collateral. As a result, if you miss payments and default, the lender can't take an asset from you.
Learn More: Secured vs. Unsecured Personal Loans
How to qualify for an unsecured loan
If you're interested in qualifying for an unsecured loan, start by deciding on the specific type of unsecured loan product you want. For example, do you want an unsecured credit card, personal loan, or BNPL loan?
Once you decide, shop around with different providers and check their eligibility requirements. Each will have a unique process for evaluating applicants, and some will be more lenient than others.
However most will require basic background information, like the following:
- Your name
- Your address
- Your income
- Pay stubs, W-2s, or bank statements
- Your email address and phone number
Lenders typically conduct a hard credit inquiry when you apply for a loan to review your financial background. This can temporarily ding your credit score for up to a year.
Related: How Does a Personal Loan Affect Your Credit Score?
How to get an unsecured loan
1. Collect quotes from lenders
Collect quotes from lenders: Once you find a handful of lenders that look like good fits, collect quotes to find out the rates and terms that each may offer you.
For example, if you're looking for an unsecured personal loan, most lenders allow you to request a quote, or prequalify, on their website or through a loan marketplace (like Credible) without hurting your credit. Prequalification includes a soft credit check and is an estimate of what your rates may look like. However, it's not an official offer of credit and your rates may change once you formally apply.
2. Compare quotes
Compare the loan amounts, APRs, fees, terms, monthly payment amounts, and total costs. Look for a loan with a payment you can comfortably afford from a lender you feel good about. See if you'll get a discount for autopay plus what other discounts are available. Keep in mind that a longer loan term can equate to a lower monthly payment, but higher interest costs over the life of the loan. Make sure a longer term makes sense if you choose one.
3. Apply
If you end up finding a good fit, the next step is to complete the full application. This step will usually require a hard credit check, which could impact your score, and you'll likely need to submit documents to verify your identity and income. If the lender approves you, review the loan documents carefully before signing. Once you agree to the loan, lenders may send the loan funds as soon as the same day, depending on the type of loan you've applied for.
Learn More: How To Get a Personal Loan
Best unsecured loans
The best unsecured loan for you won't necessarily be best for someone else. Different lenders cater to different borrowers. For example, some focus on excellent-credit borrowers who need large loans, while others focus on bad-credit borrowers who need smaller amounts and are willing to pay a higher APR.
These are the best unsecured personal loans. Personal loans can be used for a wide range of purposes, and typically have higher loan amounts and lower interest rates than credit cards.
Credible rating
Fixed (APR)
6.99% - 25.49%
Loan Amounts
$5,000 to $100,000
Min. Credit Score
700
Credible rating
Fixed (APR)
7.80% - 35.99%
Loan Amounts
$1,000 to $50,000
Min. Credit Score
620
Credible rating
Fixed (APR)
-
Loan Amounts
$2,500 to $40,000
Min. Credit Score
660
Credible rating
Fixed (APR)
8.98% - 35.99%
Loan Amounts
$1,000 to $40,000
Min. Credit Score
660
Credible rating
Fixed (APR)
8.99% - 29.99%1
Loan Amounts
$5,000 to $100,000
Min. Credit Score
Does not disclose
Credible rating
Fixed (APR)
8.99% - 35.99%
Loan Amounts
$2,000 to $50,000
Min. Credit Score
600
Credible rating
Fixed (APR)
9.99% - 35.99%
Loan Amounts
$1,000 to $50,000
Min. Credit Score
600
Credible rating
Fixed (APR)
-
Loan Amounts
$5,000 to $35,000
Min. Credit Score
700
Credible rating
Fixed (APR)
11.69% - 35.99%
Loan Amounts
$1,000 to $50,000
Min. Credit Score
560
Credible rating
Fixed (APR)
-
Loan Amounts
$20,000 to $200,000
Min. Credit Score
660
Credible rating
Fixed (APR)
18.00% - 35.99%
Loan Amounts
$1,500 to $20,000
Min. Credit Score
540
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
What happens if you default on an unsecured loan?
If you default on an unsecured loan, the lender can make collection attempts, send your account to a collection agency, report missed payments to the credit bureaus, and sue you to get a judgment.
With a judgment, they can then take actions to recover the amount you owe, such as putting a lien against your property or garnishing your wages. With a secured loan, the lender can seize your collateral to recover the amount you owe without taking you to court.
FAQ
Are payday loans secured or unsecured?
Payday loans are considered unsecured loans. Lenders typically don't require you to pledge any collateral to get them. They do, however, often ask you to write a postdated check or allow an automatic electronic money transfer from your account on the payment due date.
Related: Payday Loans vs. Personal Loans
Does bankruptcy eliminate unsecured loans?
It's possible to eliminate a range of debts through bankruptcy. What you qualify for will depend, in part, on the type of bankruptcy you're eligible for, and the type of unsecured loans you wish to eliminate. However, this should be a last resort once you've taken other steps, like talking to a credit counselor and starting a debt management plan. Consult with a bankruptcy attorney before filing.
Is a personal loan secured or unsecured?
Personal loans can be secured or unsecured. Most lenders offer unsecured personal loans, but some also offer secured options. Upgrade, for example, will allow select applicants to pledge their car as collateral if it will help them qualify. Other lenders might let you pledge a savings account or investments in exchange for a lower rate.
Is a student loan secured or unsecured?
Both federal and private student loans are unsecured, meaning you won't have the option to secure them by pledging collateral.
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