What Is an Unsecured Loan?

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When you want to borrow money, but you don’t have collateral, an unsecured loan might be your best choice. Simply put, an unsecured loan — also known as a personal loan or no collateral loan — is not attached to something valuable you own, such as your car or home.

Secured loans are tied to assets, or collateral, so if you don’t pay back a secured loan, the institution that issued the loan can take your collateral as payment.

Find Out: What Is the Difference Between a Secured Loan vs. an Unsecured Personal Loan?

What Is an Unsecured Loan and How to Get One

Unsecured loans are considered higher risk loans for lenders, which means that unsecured loan rates are generally a lot higher than secured loan rates. These are a few things a lender will consider when he determines your eligibility for this type of loan:

  • Credit score: Again, since this type of loan is a higher risk for lenders, most will require higher credit scores to qualify.
  • Debt load: Lenders want to see how much debt you are already responsible for before giving you more. If you have a lot of debt, try paying some off before you apply for an unsecured loan to increase your chances of getting approved.
  • Income: Lenders want to make sure you have job and income stability. Since you are not offering collateral, they need to know you have the means to pay the loan back.
  • Size of the loan: Lenders tend to approve smaller unsecured loans. If you need to borrow a lot of money, consider going with a secured loan instead.

While lenders cannot seize your property if you default on your unsecured loan, you can face other serious consequences. Your credit score can suffer and you might face financial penalties, such as late fees on missed payments; these fees typically go up every 30 days the payment is late. Lenders can also sue you for the outstanding loan amount and eventually get the court to garnish your wages or even force you to liquidate a particular asset.

Types of Unsecured Loans

There are several types of unsecured loans, and you might have accessed one of them at some point. Read on to discover some of the different types of unsecured loans.

  • Student loans: Student loans are also considered unsecured loans; note that their interest rates, repayment plans and grace periods vary among financial institutions.
  • Credit cards: Credit cards provide unsecured loans in that you are borrowing money from the credit card company to make a purchase and promising to pay it back at a later date.
  • Line of credit: Although a line of credit can take the form of a secured loan if you have collateral you want to use against it, people often use a line of credit as an unsecured loan. When you take out a line of credit as an unsecured loan, you have a cap on the amount you can borrow, which is calculated by your credit score.
  • Signature loans: Signature loans are just what they sound like — loans that require only your signature. Also known as good faith loans, these are personal loans that most banks and credit unions offer.

When to Choose an Unsecured Loan

While secured loans can result in a better financial deal, because they come with lower rates, unsecured loans are an option for individuals who want to borrow money but don’t have assets or collateral. Whichever kind of loan you decide on, weigh your options carefully and make sure you get the best terms and rates available to you.