What Is an Unsecured Personal Loan?

An unsecured loan is a loan that doesn’t require collateral, like a house or car, for approval. Instead, lenders issue this type of personal loan based on information about you, like your credit history, income and outstanding debts.

Unlike with a mortgage or auto loan, if you don't repay an unsecured loan, a lender can't repossess any of your personal belongings, but your credit will take a hit.

You can use funds from an unsecured personal loan to pay for almost anything, but the best personal loan helps you achieve a financial goal without adding unmanageable debt.

If you’re considering an unsecured loan, learn the pros and cons, what they can be used for, where to get one, how to qualify and what happens if you don't pay it back.

» COMPARE: The best unsecured personal loans

Unsecured personal loans come in a lump sum — anywhere from $1,000 to $100,000 — and you repay them in equal monthly installments that include interest.

Annual percentage rates on unsecured personal loans range from about 6% to 36%. Borrowers with good to excellent credit (690 credit score or higher) will likely qualify for the lowest APR. An unsecured loan’s APR includes interest and any fees, such as origination fees, and reflects the cost of the loan.

For example, if you borrow $10,000 with a three-year repayment term at 15% APR, you’ll pay $2,480 in interest. The same loan with a 10% APR costs $1,616 in interest.

Repayment terms, ranging from two to seven years, also affect total interest. The longer the term, the more interest you’ll pay.

Most personal loans are unsecured loans. Only a few lenders allow borrowers to use collateral — typically a vehicle or savings account — to secure a personal loan.

Lenders generally view unsecured personal loans as riskier than secured loans, because if a borrower defaults on an unsecured loan, the lender can’t seize the borrower’s assets to offset the financial loss.

To balance that risk, lenders usually charge higher rates and have tighter borrowing requirements for unsecured loans than secured loans.

» MORE: Compare secured personal loans

Approval may be faster for an unsecured loan because lenders don’t have to assess any collateral to make a decision.

» MORE: Secured vs. unsecured loans: What's the difference?

Lenders may market unsecured personal loans for different purposes, but they can be used for almost any expense. Below are some of the most common.

Loans that improve your financial health: Home improvement and debt consolidation loans are two ways to use an unsecured personal loan that contribute to your financial goals. With a home improvement loan, you can make updates to your home that increase its value. A debt consolidation loan with a low interest rate can be a less expensive way to pay down existing debt.

Loans for discretionary expenses: Though you can use an unsecured personal loan to fund a discretionary expense, like with a wedding loan or vacation loan, NerdWallet recommends using savings instead. If you need to finance this kind of expense, compare all your options, and only get a loan if it’s the cheapest financing option available.

Loans for unplanned expenses: Unsecured loans for things like emergencies and medical bills should be considered as a last resort. You likely have cheaper alternatives in an emergency, like a medical payment plan or a local resource. If you urgently need a loan, look for a lender that offers fast funding, low rates and minimal fees.

» MORE: Top reasons to get a personal loan

You can get an unsecured personal loan from an online lender, credit union or bank. These lenders will assess your ability to afford the loan and report payments to the three major credit bureaus — Equifax, Experian and TransUnion.

When comparing loans from different lenders, consider the interest rate as well as the monthly payment. Use a personal loan calculator to get estimated payments and interest costs based on loan amount, interest rate and loan term.

Many lenders offer pre-qualification, a short process that involves submitting basic personal information and, within minutes, getting a preview of the loan you may receive. Most lenders do a soft credit check with pre-qualification, so your credit score won’t be affected.

Online lenders

Online lenders work with borrowers across the credit spectrum and are usually the fastest way to get a loan. These lenders can give you an application decision in minutes, and some can deposit money directly into your bank account within a day or two.

Credit unions

Credit unions are not-for-profit financial organizations that may provide better rates for borrowers with fair or bad credit scores. Federal credit unions cap APRs at 18% unless you’re applying for a short-term, small-dollar loan.

However, you’ll need to become a member of the credit union before applying for a credit union loan. Membership typically requires living or working near the credit union or being associated with a particular group the credit union serves, and paying a one-time membership fee, which can be as little as $5.

Banks

If you already have an existing relationship with a bank, it’s worth checking whether it offers unsecured loans. Your bank may offer larger loan amounts and lower rates for existing customers in good standing.

Bank loans often come with higher credit score requirements, though, and some may require you to close the loan in-person.

» MORE: How do bank loans work?

Here are some of the things a lender will review when deciding whether you qualify for a loan and at what rate.

Credit: For many lenders, your credit score is a key factor in a loan decision. An excellent credit score can get you access to the lowest unsecured loan rates and largest loan amounts. Bad-credit borrowers who qualify will likely get the highest rates. Lenders also look at the length of your credit history. Many require borrowers to have at least two years of credit history, but longer is better.

» MORE: What credit score do you need for a personal loan?

Debt-to-income ratio: Lenders look at your debt-to-income ratio — which is your monthly debt payments as a percentage of your monthly income — to evaluate how burdened you already are with debt. Too much debt, and a lender may decide the risk that you’ll struggle to pay a loan back is too high. Most lenders prefer applicants with a DTI below 50%.

» MORE: Calculate your debt-to-income ratio

Bank account transactions: Some lenders look at your bank account to see how much money is coming in and going out. This helps a lender understand how loan payments would fit into your monthly budget.

As with any financial product, it’s important to carefully weigh the benefits and drawbacks before you apply and sign a loan agreement.

1. Check your credit. Check your credit report for any incorrect information, such as accounts that are incorrectly reported as delinquent or the same debt listed more than once, that could be dragging down your score.

2. Pre-qualify. Many lenders allow potential borrowers to pre-qualify online to see what rates and terms they might be approved for. You can pre-qualify with NerdWallet for free to see offers from multiple online lenders. Pre-qualifying does not impact your credit score.

3. Compare loan offers. Compare the offers from pre-qualification to select the option that’s best for you. The loan with the lowest APR is generally the least expensive one.

4. Submit a formal application. Once you’re ready to apply, gather documentation, such as W-2s and bank statements, and complete an application with the lender you’ve chosen. The lender will perform a hard credit check at this time. Most lenders make approval decisions within a couple of days and can fund a loan within a week.

» MORE: How to start your loan application

If you default on an unsecured loan, the most immediate impact will be to your credit score. A missed payment that’s more than 30 days late could cause your score to drop about 100 points and stay on your credit report for up to seven years.

If the delinquency goes on long enough, the lender can sell your debt to a third-party debt collection company or sue you for nonpayment, which may lead to wage garnishment or a lien on your property to recover the debt.