Life happens, and sometimes you need financial support to reach your goals. Whether you’re thinking of upgrading your home, pursuing education, or getting out from under debt, an unsecured loan may be the right solution. An unsecured loan is a flexible personal loan option that doesn't require you to put up collateral (like your home, car, or boat) to qualify.
If you’re wondering how to get a personal loan without collateral, keep reading as we break down what unsecured loans are, weigh their advantages and disadvantages, understand typical requirements, and determine whether an unsecured loan might be the right fit for your unique financial situation and goals.
Unsecured loan: A definition
While an unsecured loan doesn't require you to offer collateral, you'll want to keep in mind that lenders that offer these types of loans may impose more stringent financial and credit requirements, such as a higher credit score and lower debt-to-income ratio (DTI). That's because an unsecured loan hinges on lending requirements that heavily weigh on your financial stability and credit profile.
Unsecured loans vs. secured loans
While an unsecured loan doesn't require collateral, with a secured loan you'll need to provide the lender with an asset or valuable item to secure the loan. Examples of secured loans include mortgages and auto loans.
When you offer something of value as collateral to the lender to back the loan, the risk for the lender decreases. That's because should you have trouble keeping up with your payments and default on your loan, the lender can take possession of the collateral to get their money back. When the risk to the lender decreases, this can mean potentially lower interest rates.
How does an unsecured loan work?
The terms of an unsecured loan hinge on your credit profile and financial situation. And while requirements might vary by lender, unsecured loans typically have higher credit score requirements than secured loans.
When applying for an unsecured loan, you'll need to submit proof of income. The lender will also do a hard inquiry on your credit, and will look at your debt-to-income ratio (DTI), credit history, and credit score.
The annual percentage rate (APR) of an unsecured loan hinges on your creditworthiness. If you have a higher score, you might be offered better rates and terms. Typically, a credit score of 650 or higher is needed to land an unsecured loan with good rates and terms. It’s important to know credit score requirements vary by lender, and you may be able to find terms that work for you even with a lower score.
Where to find unsecured loans
Most financial and lending institutions and online personal loan platforms offer unsecured loans. You can explore rates, terms, and loan amounts at a financial platform, big bank, regional bank or credit union, or online lender.
If you're an existing account holder at your bank or a member of a credit union, you might have an easier time getting approved for an unsecured loan. That's because you have an established relationship and financial track record with that financial institution. And you might get better rates and better terms through a credit union.
Common types of unsecured loans
For the most part, unsecured loans are designed as either revolving lines of credit, such as a credit card, or as no-collateral installment loans. Here are some of the common types of unsecured loans:
Unsecured personal loans
The beauty of unsecured personal loans is that it can be used for many different financial needs and purposes that can help you with your goals. Here are some popular ways you can use a personal loan:
● Debt consolidation
● Home improvements
● Emergency auto repairs
● Medical bills
● Buying a new vehicle
● Funding a small business
Unsecured credit cards
Most credit cards are unsecured. Credit cards offer a credit limit, allowing the cardholder to use this line of credit to make small or large purchases. Credit cards usually have higher interest rates than personal loans. You can see current credit card rates here.
A secured card, on the other hand, requires a small deposit to cover the credit limit. These are typically designed for folks who are new to credit or are working on re-establishing credit. Usually, the small deposit matches the credit limit. So, if your deposit is $250, so is your credit limit.
Peer-to-peer loans
Peer-to-peer (P2P) loans are offered via online lending platforms. As the term implies, these are loans that allow borrowers to secure the funds they need from private investors or "peers" outside of traditional financial institutions. They'll match you with investors who are willing to loan you money and handle the details of the transaction.
While P2P loans can offer lower rates than traditional forms of financing and the loan application process can only take a few minutes, the lending criteria tend to be stricter. Further, the available loan amounts can be smaller.
To make sure P2P loans are a good fit for you, you'll want to do your homework to get your head around the lending requirements, terms, and rates.
Student loans
Another form of unsecured financing is student loans. More than 42 million student borrowers have federal student loan debt. This makes up for nearly 92% of student loan debt in the country.
Student loans are used for funding education and related expenses, such as tuition, housing, books, supplies and equipment, transportation, and personal costs.
When you shoulder federal student loan debt, the interest rate is fixed and usually lower than private loans. Once your grace period is up, you're financially responsible for your monthly payments.
Private student loans are subject to different repayment terms, variable or fixed interest rates, and requirements. They also tend to be more expensive than federal loans.
Personal lines of credit
A personal line of credit is a revolving line of credit. Like a credit card, you'll have access to a credit limit, and you can tap into your credit limit as much as you need each month. As the balance is repaid, the credit line replenishes.
Personal lines of credit usually have variable interest rates, which means that when interest rates rise, your credit will cost you more. Plus, your monthly loan payments can vary.Who should use an unsecured loan?
If you're not comfortable with using collateral to secure a loan, an unsecured loan could be a solid financing option. When approving your loan, these loans lean more heavily on creditworthiness and financial stability, so you'll need to pay close attention to loan requirements before you apply.
An unsecured loan might be right for you under these circumstances:
- You have a good credit score. Unsecured loans usually require higher credit scores, and the interest rates on these loans are also influenced by your creditworthiness.
- You have a stable income. Unsecured loans require proof of income. Because these loans are backed by collateral, they carry more risk to the lender. In turn, steady income is a must. Lenders also factor in your debt-to-income (DTI) ratio.
- You need to consolidate debt. Personal loans can be a solid route to take if you want to consolidate high-interest debt into a single, lower payment. While the interest rates hinge on your creditworthiness and other financial factors, unsecured personal loans are often much lower than that of credit cards.
- You want to make a big purchase. If you have your eye on a big-ticket item or expense, unsecured personal loans or lines of credit can be used to purchase major appliances or even help fund a car.
You won't need to put up collateral to qualify for the loan. Plus, lower interest rates on unsecured loans can make them a more affordable and attractive financing option.
Pros and cons of unsecured loans
The table below looks at some of the advantages and downsides of unsecured loans.
Pros
First, let's explore the potential advantages of having an unsecured loan.
No collateral requirements
Because unsecured loans don't require collateral, should you find yourself needing to default on a loan, you aren't at risk for losing an asset or valuable item.
Shorter funding time
The time frame for receiving funds for an unsecured loan can be very short. Rocket Loans may be able to provide same-day funding for personal loans if lender requirements are met. If you need money right away, the benefit of expedited funding could make it a great choice.
Consistent monthly payments
If you have a fixed-interest-rate unsecured loan, that means that monthly payments remain the same throughout the duration of the loan. Some unsecured loans do have variable interest rates. You'll want to carefully read through the fine print and do your homework on different options to figure out what's best for you and your financial situation.
Cons
Now, let's look at some of the potential downsides of an unsecured personal loan.
A potentially high APR
Unsecured loans can have a high APR. The APR represents the total cost of the loan, which includes interest and fees. You can do your homework to find the best option and the lowest APR possible. If your credit score is on the low side, you may be offered higher interest rates and less favorable terms.
The possibility of a variable interest rate
Credit cards and lines of credit may have variable interest rates that go up or down with general market rates. This can lead to higher monthly payments for you. You'll want to look carefully and see if a loan has a variable interest rate or a fixed one.
Origination fees
Unsecured personal loans typically have origination fees. These are fees that cover the loan processing costs. While the amount can vary from lender to lender, they tend to range from 1% to 10% of the loan amount. For example, if you take out a loan for $10,000, you're looking at $100 to $1,000.
While origination fees are one-time charges they can still increase borrowing costs. In turn, it's a good idea to budget for origination fees when you're applying for unsecured loans.
How to get a personal loan without collateral
Let's look at the six steps to apply for an unsecured loan:
1. Check your credit profile. To see where your credit stands, it's important to review your credit reports and check your credit score. You can get a free weekly credit report at www.annualcreditreport.com from each of the three bureaus–Experian, Equifax and TransUnion.
Looking at your credit reports helps you spot errors and missing information, and it can also help you see what areas you can improve on to help boost your score.
You can check your credit score for free from some credit card issuers and credit monitoring services.
2. Determine your loan amount. It’s important to understand how much money you’ll need to borrow. If you’re borrowing to cover debt consolidation, carefully add up your debts and then consider the origination fee on top of that so you’re sure to borrow enough to cover your costs.
Remember: it's not free money, and you're on the hook for paying the amount plus interest and fees. You'll want to budget for monthly loan payments once you have your loan.
3. Find the best lender for you. To see what loan amounts, rates, and terms you'll qualify for, it's a good idea to do your homework and get quotes from different lenders. You may also want to explore personal loans with varying terms.
4. Get prequalified to compare offers. When you get prequalified for a loan, the lender reviews your creditworthiness. This gives you an idea of the loan amount, interest rates, and terms. It doesn't impact your credit score, as only a soft credit inquiry is required.
5. Submit an application. When applying for an unsecured loan, it requires you to submit personal documentation such as proof of income and proof of identification, proof of address, and employment status.
6. Receive the loan funds. If the loan is approved, generally you'll be able to access the funds within one to seven business days.
FAQ
You can learn more about unsecured loans by exploring these frequently asked questions about the topic.
Can I get an unsecured loan with bad credit?
While a good or excellent credit score will typically get you at least a decent interest rate, it’s possible to still be approved for an unsecured loan with a score as low as 610 – 640. With a low credit score, though, you’ll likely have a higher interest rate.
What happens if I don’t pay off my unsecured debt?
If a borrower defaults on an unsecured loan, their credit score will take a hit, and the effects may be long-lasting. A loan default can remain on a borrower’s credit report for up to 7 years.
The lender may also accelerate the loan’s repayment, meaning the entire balance will be due immediately in the form of a balloon payment. If the borrower fails to make the full repayment, their debt may be sold to a collection agency.
Should I use an unsecured loan?
This loan option may be right for people who have a major expense, a reasonable DTI, and a high credit score. These borrowers will likely receive at least a lower interest rate, making the monthly payments more manageable.
If your credit score is not as high as you’d like, a lender is likely to stick you with a higher interest rate if you’re approved. A higher rate can make it harder to afford the monthly payments, putting your credit score at risk.
If you’re concerned about making payments in full and on time, consider improving your credit score before applying for an unsecured loan.
The bottom line: Unsecured loans offer financing without collateral
Unsecured loans can offer you a form of financing without needing to offer an asset up for collateral. While it can give you a speedy way to access funds with predictable, steady monthly payments, unsecured loans can also come with origination fees and a potentially high APR. Research your options to figure out which is the best route for you.
If you’re ready to see what you may qualify for, you can reach out to Rocket Loans℠ and apply for a personal loan today.
Jackie Lam
Jackie Lam is a seasoned freelance writer who writes about personal finance, money and relationships, renewable energy and small business. She is also an AFC® financial coach and educator who helps creative freelancers and artists overcome mental blocks and develop a healthy relationship with their finances. You can find Jackie in water aerobics class, biking, drumming and organizing her massive sticker collection.
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