Tired of lenders asking for your car title or house deed just to get a loan? Then the right question to ask is, what is an unsecured loan?
An unsecured loan can be a financial lifeline when you need funds but don’t have assets to offer as collateral. Unlike secured loans that require you to put up your home, car, or other valuable property as a guarantee, unsecured loans are based primarily on your creditworthiness and income.
Loans without collateral have become increasingly popular for everything from debt consolidation to home improvements.
But before you apply, it’s crucial to understand how unsecured loans work, their advantages and potential pitfalls, and whether they’re the right choice.
MoneyLion can help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
How does an unsecured loan work?
Unsecured loans work by providing borrowers with funds based solely on their promise to repay, verified through their credit history, debt-to-income ratio, and income – without requiring any collateral like a house or car. Based on these factors, lenders will determine whether to approve your loan and at what interest rate.
Unsecured lending can provide flexibility and quick access to funds when you need them, but it’s important to carefully consider the higher costs and your ability to make regular payments. And while lenders can’t automatically seize property if you default, they can still pursue collections against you.
| What to know about unsecured loans |
| Loan terms typically range from 1 to 7 years ⏰ |
| Interest rates are usually higher than secured loans 💸 |
| Missing payments can seriously damage your credit score ⚠️ |
| Funds can be used for almost any legitimate purpose ✨ |
💡 Example: Imagine you need $5,000 for emergency dental work, so you take out a personal loan from your bank based solely on your credit score and income – without having to put up your car, house, or any other asset/s (boat lovers, looking at you👀) as collateral.
Application and approval process for unsecured loans
Unlike secured loans that require collateral, unsecured loans operate on the principle of trust between lender and borrower. Although the process can look different depending on different lenders, here’s what you can generally expect:
- Initial application: Submit financial information including proof of income, employment history, and other documentation showing your ability to repay
- Credit review: Lenders perform a hard credit check and evaluate your debt-to-income ratio
- Loan terms: If approved, you receive an offer specifying interest rate, loan term, and monthly payments
- Fund disbursement: Money typically appears in your bank account within a few business days.
⚡Pro tip: Use MoneyLion to help you find personal loan offers based on the info you provide. You can get matched with offers for up to $50,000 from our top providers. Compare rates, terms, and fees from different lenders and choose the best offer for you. Get started.
How to qualify for an unsecured loan
Ready to apply? Here’s what lenders typically look for when it comes to unsecured loans:
- Credit score: Most lenders look for 670+ for best rates. Some accept 580-669 with higher rates
- Debt-to-income ratio: Most lenders prefer DTI below 40% (including the new loan)
- Income: Stable, verifiable income that comfortably covers loan payments
- Employment history: Usually need 2+ years of steady employment
- Bank account: Active checking account for loan disbursement and payments
Recommended: What Credit Score is Needed for a Personal Loan?
What types of loans are unsecured?
Unsecured lending can come in various forms, each designed to serve different financial needs. Here are the most common types of unsecured loans you’ll encounter:
Personal loans
Personal loans are one of the most common types of unsecured loans. General-purpose loans from banks, credit unions, or online lenders. These flexible loans can be used for various purposes, from debt consolidation to home improvements.
Student loans
Government or private loans specifically for education expenses, including tuition, books, and living costs. Federal student loans often the most more flexible repayment terms and lower interest rates.
Credit cards
Credit cards offer revolving unsecured credit, letting you borrow up to your limit and repay over time. They’re perfect for everyday purchases and building credit when used responsibly. However, they can also come with higher interest rates than other unsecured loans.
MoneyLion can help you explore a wide variety of credit card options tailored to different needs and preferences.
What is the difference between a secured and unsecured loan?
When comparing secured vs unsecured loans, the main distinction lies in collateral requirements. Secured loans require you to pledge assets like your home or car (or a boat!), while unsecured loans rely solely on your creditworthiness.
Here’s how they stack up:
| Feature | Secured loans | Unsecured loans |
| Collateral requirement | Yes – typically a house, car, or other asset 🏠 | No collateral needed 🚫 |
| Common examples | Mortgages, auto loans | Personal loans, student loans, credit cards |
| Interest rates | Generally lower due to reduced risk | Higher rates due to increased lender risk |
| Application approval process | Based on collateral value and credit history | Based solely on credit score and income |
| Funding amount | Usually larger amounts due to collateral backing | Often smaller amounts due to higher risk |
| Loan processing time | Longer due to collateral valuation | Typically faster approval and disbursement |
| Risk to borrower | Risk losing collateral if you default | No asset at risk, but severe credit damage |
| Typical terms | Longer terms (10 to 30 years common) | Shorter terms (1 to 7 years typical) |
| Typical credit requirements | More flexible due to collateral security | Stricter credit score requirements |
| Default consequences | Lender can seize collateral | Collections and legal action |
Recommended: Secured vs. Unsecured Loan: Which Should You Choose?
Who should get an unsecured loan?
Unsecured loans can be a good financial solution for certain situations and borrowers. Here’s who might benefit most:
- Good credit score holders: People with credit scores above 670 are ideal candidates since they’ll typically qualify for the best interest rates and terms, making the loan more affordable.
- Debt consolidators: If you’re juggling multiple high-interest debts (like credit card balances), an unsecured loan could help simplify payments and potentially lower your overall interest rate.
- Short-term goal achievers: Those who need a specific amount of money for a clear purpose (like home renovations or wedding expenses) and have a solid plan to repay the loan within a few years.
- Emergency expense handlers: People facing unexpected costs (like medical bills or major car repairs) who don’t have adequate savings but do have steady income to handle monthly payments.
Who should think twice:
- Those with poor credit scores, as interest rates may be high
- People without stable income to make regular monthly payments
- Anyone who could qualify for a lower-interest secured loan instead
- Those who need very large loan amounts (over $50,000)
- People already struggling with existing debt payments
What are the benefits and downsides of an unsecured loan?
Unsecured loans offer convenience and flexibility without risking your assets, but you’ll likely pay for this security through higher interest rates.
| Pros | Cons |
| No collateral required: Your assets won’t be at risk – you won’t lose your home or car if you default | Higher interest rates: You’ll typically pay more in interest than with secured loans |
| Quick funding: Typically faster approval and disbursement than secured loans | Stricter qualification requirements: Likely need better credit and solid income to qualify |
| Flexible use of funds: Can be used for almost any legitimate purpose | Lower borrowing limits: Usually can’t borrow as much as with secured loans |
How to apply for an unsecured loan
Want to know if you qualify for an unsecured loan? Finding loan offers is easier than you might think when you use MoneyLion.
Step 1: Start by inputting how much you want to borrow and what you’ll use the loan for. We’ll ask for your approximate credit score and some basic personal information. Don’t worry about your credit at this stage – checking for offers won’t affect your score.
Step 2: MoneyLion’s smart technology quickly analyzes your profile to find suitable lenders from our trusted network, delivering personalized loan offers within minutes.
Step 3: Take your time to review and compare different loan offers, looking at interest rates, terms, and monthly payments. There’s no pressure – you’re not obligated to accept any offer.
Smart borrowing starts here
Unsecured loans can be your ticket to achieving financial goals without risking your assets (or boat!). Whether you’re consolidating debt or funding a major purchase, understanding your options helps you make the best choice for your present and future situation.
FAQs
What is an unsecured personal loan?
An unsecured personal loan is a type of borrowing that provides funds based solely on your creditworthiness, without requiring any collateral like a house or car as security for the loan.
What is an example of an unsecured loan?
A credit card is the most common example of an unsecured loan, where you’re given a credit limit based on your credit history and income, without putting up any assets as collateral.
Which loan is better, secured or unsecured?
While secured loans typically offer lower interest rates and higher borrowing amounts, unsecured loans might be better if you don’t want to risk losing assets or don’t have collateral to offer.
Can I get an unsecured loan with bad credit?
While it’s possible to get an unsecured loan with bad credit, you’ll likely face much higher interest rates and may need a co-signer. Consider improving your credit score first or checking out secured loan options.
