• Skip to primary navigation
  • Skip to main content
  • Skip to footer

FinanceJar

FinanceJar

Take the next step on your journey

  • Credit Scores
    • Get Free Credit Score
    • Get Your Free FICO Score
    • Credit Score Range
  • Credit Repair
  • Credit Reports
    • Credit Inquiries
  • Credit Cards
    • Credit Card Reviews
    • Best Credit Cards for Bad Credit
    • Fair Credit
    • No Credit
    • Building Credit
    • Secured
    • Unsecured
    • 0% Interest
    • No Annual Fee
    • Guaranteed Approval
    • No Credit Check
    • No Foreign Transaction Fee
    • Gas
    • Students
  • Debt
    • List of Collection Agencies
  • Loans
  • About Us
  • 24/7 Support:

    323-649-8707

Home Loans Unsecured Loans: What They Are and How They Work

Unsecured Loans: What They Are and How They Work

Locked suitcase of money representing secured loan

At a glance

You can take out an unsecured loan without putting down any collateral, but there are a few catches. Read on to learn how unsecured loans work and how to get one.

Written by Samuel Osbourne and Jesslyn Firman

Reviewed by Victoria Scanlon and Robert Jellison

Nov 5, 2021

Fresh advice you can trust

We promise to always deliver the best financial advice that we can. Our writers and editors follow strict editorial standards and operate independently from our advertisers and affiliates. Learn more about how we make money.

Table of Contents

  1. What is an unsecured loan?
  2. How do unsecured loans work?
  3. Secured vs. unsecured loans: what’s the difference?
  4. Advantages and disadvantages of unsecured loans
  5. How to get an unsecured loan in 5 steps

What is an unsecured loan?

An unsecured loan is a type of loan that isn’t backed by collateral, which is an asset (or a collection of assets) that your lender can seize if you fail to pay back your debts on time, known as defaulting.

If you default on a collateral-backed loan (known as a secured loan), your lender can immediately take your collateral as compensation. By contrast, if you default on an unsecured loan, none of your assets will immediately be at risk. It’s still possible for your lender to seize your property if they take you to court and win a judgment against you, but this is more difficult than simply claiming your collateral.

Common examples of unsecured loans include student loans and unsecured personal loans, both of which are installment loans. There are also unsecured credit cards, which are a type of revolving credit account.

How do unsecured loans work?

When you apply for an unsecured loan, your prospective lender will check your credit and consider other factors like your income to evaluate your risk as a borrower and decide whether to approve or deny your application.

Your loan’s annual percentage rate (APR) is the yearly interest rate that you’ll pay. Depending on the type of loan you’re getting, your lender might charge you additional fees for processing it. Your APR includes these added costs.

Your lender will report your account balance to the nationwide credit bureaus (Equifax, Experian, and TransUnion) every 30–45 days. 1 If you pay your bills on time, your credit score will increase. However, if you miss a payment, you’ll get a derogatory mark on your credit report and your credit score will drop.

Get a cosigner if you have poor or no credit.

You can get an unsecured loan if you have a bad credit score, but your lender may require you to get a cosigner. If you default on your loan (meaning you fall very behind on your payments), your cosigner is legally responsible for repaying your debt.

Types of unsecured loans

The following are common examples of unsecured loans:

  • Unsecured personal loans
  • Student loans
  • Personal lines of credit

Secured vs. unsecured loans: what’s the difference?

As mentioned, unlike unsecured loans, secured loans require some form of collateral. This can be a monetary deposit or a valuable asset (such as a car or house).

When you take out a secured loan, you place a “lien” on your collateral, which grants your lender the legal right to seize (or repossess) it if you fail to pay them back as agreed.

The following are all types of secured loans:

  • Mortgage
  • Home equity line of credit
  • Home equity loan
  • Car loan
  • Pawnshop loan
  • Secured line of credit
  • Life insurance loan
  • Title loan

Unsecured loans are generally much harder to qualify for than secured loans because they put lenders at higher risk. They also often come with higher interest rates than secured loans do. 2

Advantages and disadvantages of unsecured loans

Unsecured loans have a lot of advantages, but they also have some drawbacks.

Advantages of unsecured loans

Unsecured loans have two main benefits:

  • Short application process: You don’t need to get any of your assets appraised to get an unsecured loan, so you can get your funds more quickly than with some types of secured loans. If you need quick cash, that’s a significant draw.
  • No collateral: If you default on your payments, your lender usually can’t repossess your car or foreclose on your home (without taking you to court).

Disadvantages of unsecured loans

Unsecured loans also have three significant drawbacks:

  • High-interest rates: Although the lack of collateral simplifies the application process for unsecured loans, it also means that lenders will charge higher interest rates to compensate for the increased risk they’re taking on when they lend you money.
  • Qualifying is difficult: Lenders often have higher credit score requirements for unsecured loans because they want reassurance that you’ll repay your debt. If you have poor credit, you usually won’t be able to qualify.
  • You can still lose your assets: If your lender gets a court judgment against you because you defaulted on your unsecured debt, they can garnish your wages (meaning they can take a portion of your salary as payment). 3 They can also take your property or even your home if the judge rules that a lien should be put on your property. 4

How to get an unsecured loan in 5 steps

To get an unsecured loan, follow these five steps:

1. Make sure you’re qualified

Lenders are selective about which consumers they’ll offer unsecured loans to. If you can’t provide them with good reason to think you’ll make all your payments on time, they won’t want to issue you a loan.

When assessing your eligibility, lenders generally consider the following factors:

  • Credit score: Your credit score is a numerical representation of your creditworthiness. Virtually all lenders use it to determine how likely you are to pay your bills on time. There’s no universal minimum credit score required to get a personal loan (the most common type of unsecured loan), but one of the main benefits of having good credit is that it’s easier to qualify for unsecured loans and loans with lower interest rates.
  • Income: It’s generally easier to meet a lender’s requirements if you have a good income because there’s less risk that you’ll default on payments. Prospective lenders usually ask for proof of income (i.e., pay stubs) when deciding whether to offer you a loan.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward repaying your debts. For example, if you earn $2,000 per month and spend $600 on paying your existing debts, your DTI is 30% ($600 divided by $2,000). Having a lower DTI ratio makes it easier to qualify for an uncollateralized loan.
  • Assets: Some lenders also inquire about your assets to make sure that you have emergency savings. If you do, then they’ll see you as less likely to fall behind on your loan payments.

2. Research your potential lenders

Lender requirements tend to vary, so it’s important to do your research before applying.

Start your search for an unsecured loan by checking out what options are available to you from the following lenders:

  • Online lenders: Many online lenders offer loan pre-qualification services that you can use to check your eligibility for a loan without triggering a hard inquiry (which will hurt your credit score).
  • Banks: If you already have a bank account, contact your bank to find out what unsecured loans they offer.
  • Credit unions: A credit union is a type of nonprofit financial institution that’s owned by its members. You usually need to become a member of a credit union (and pay a small fee) to get a loan. On average, credit unions tend to offer slightly lower interest rates than banks do for loans with no collateral. 5

3. Shop around for the best offer

When looking at your loan options, carefully consider these four factors to ensure that you’re getting the best deal on your unsecured loan:

  • Annual percentage rate (APR): Look for the loan with the lowest APR; this will probably be your best deal.
  • Repayment term: If you get a long-term loan, your payments will be spread out over a longer period of time, meaning each individual monthly payment will be lower than with an equally sized shorter-term loan. However, you’ll pay more money in the long run because you’ll be paying interest for a longer period. Look for a loan term that suits your financial situation.
  • Loan amount: Get a loan that’s sufficient to pay for your expenses, whatever they are. Also consider how much money lenders are willing to let you borrow. If you have poor credit, lenders might only be willing to offer you small loans.
  • Special features and discounts: Find out if prospective lenders offer any special features or discounts, like a discount for using autopay or an introductory 0% APR period.

4. Submit the application form

Once you’ve chosen a lender, submit a formal application. You can do this online or in person. Make sure to include any documents that your lender requests (like bank statements or your ID).

5. Accept the loan funds

If the lender approves your loan application, you’ll usually receive the funds directly into your checking account.

Once you’ve accepted an unsecured loan, make sure to always pay your bills on time to avoid incurring late payments on your credit report, which can seriously hurt your credit. As long as you take your obligations seriously, you’ll actually build credit over time by demonstrating that you can responsibly manage your debts.

If you didn’t previously have any installment loans, taking out the loan will also boost your credit mix, which will raise your credit score.

Takeaway: An unsecured loan is a loan that isn’t backed by collateral.

  • Collateral is an asset (or collection of assets) that your lender can seize if you don’t pay your debts.
  • Unsecured loans are risky for lenders. For this reason, lenders usually impose higher interest rates and stricter credit score requirements on unsecured loans than on secured loans.
  • Unsecured loans are quicker and easier to get than secured loans—if you qualify for them.
  • Unsecured loans aren’t risk-free for borrowers. Your lender can take you to court to garnish your wages if you default on an unsecured loan. If the judge rules to place a lien on your property, then your lender can even force you to sell your home to repay them.
  • Lenders look at your credit score, income, debt-to-income ratio, and assets when determining your eligibility for an uncollateralized loan.

Article Sources

  1. TransUnion. "How Long Does it Take for a Credit Report to Update?" Retrieved November 5, 2021.
  2. Consumer Financial Protection Bureau. "Differentiating between secured and unsecured loans" Retrieved November 5, 2021.
  3. Consumer Financial Protection Bureau. "What should I do if a creditor or debt collector sues me?" Retrieved November 5, 2021.
  4. Consumer Financial Protection Bureau. "What is a judgment?" Retrieved November 5, 2021.
  5. National Credit Union Administration. "Credit Union and Bank Rates 2021 Q3" Retrieved November 5, 2021.

Samuel Osbourne

Content Writer

View Author

Sam Osbourne is a content writer for FinanceJar. His writing covers credit scores, credit repair, and renters insurance. He’s worked across a mixture of genres, including blogs, essays, and fiction. Sam has a Master’s degree in Creative Writing.

Jesslyn Firman

Credit Analyst

View Author

Jesslyn Firman is a credit analyst for FinanceJar. Her work covers credit repair and credit scores, and in the past she's extensively researched and written about the insurance industry. Jesslyn has a B.S. in Finance and Accounting and an MBA in Management.

Related Articles

Credit report showing SYNCB/PPC
Credit Inquiries

Nov 5, 2021

SYNCB/PPC: What Is It and Why Is It on My Credit Report?

SYNCB/PPC stands for Synchrony Bank/PayPal Credit. There are a few...

FinanceJar Team
Polar bear guarding credit report in ice, representing how to freeze your credit
Credit Reports

Sep 22, 2021

How to Freeze Your Credit

A credit freeze prevents prospective lenders and creditors from...

Samuel Osbourne
new credit card envelope does it hurt credit
Credit Scores

Oct 1, 2021

Does Opening a Credit Card Hurt Your Credit?

Opening a new credit card can hurt your credit score slightly in...

FinanceJar Team
Black car being repossessed which has an impact on credit
Credit Repair

Aug 5, 2022

How Long Does a Repo Stay on Your Credit?

A repossession takes 7 years to come off your credit report,...

FinanceJar Team
Gauge representing credit utilization rate
Credit Scores

Oct 6, 2021

Credit Utilization: What It Is and How It Affects Your Credit Score

Your credit utilization is the amount of your revolving credit that...

FinanceJar Team
Man disputing an item on his credit report with the credit bureaus
Credit Repair

Sep 13, 2021

How to Dispute an Item on Your Credit Report

If you suspect you have inaccurate information on your credit...

Victoria Scanlon
FinanceJar

Footer

Credit

  • Credit Scores
  • Credit Repair
  • Credit Reports
  • Credit Cards
  • Debt

Company

  • About Us
  • Contact Us

Legal

  • Terms & Conditions
  • Privacy Policy

Call Us

9AM – 9PM EST: 347-527-4868
24/7 Help Line: 323-649-8707

How We Make Money

We make money from advertising. We place links on our website to our affiliates, and when you click those links, our affiliates compensate us for it. Our relationships with our affiliates may affect which products we feature on our site and where these products appear in our articles.

Facebook Twitter Instagram TikTok YouTube LinkedIn Pinterest

© 2025 – ONR Financial Networks LLC – All Rights Reserved.

  • Credit Scores
    • Get Free Credit Score
    • Get Your Free FICO Score
    • Credit Score Range
  • Credit Repair
  • Credit Reports
    • Credit Inquiries
  • Credit Cards
    • Credit Card Reviews
    • Best Credit Cards for Bad Credit
    • Fair Credit
    • No Credit
    • Building Credit
    • Secured
    • Unsecured
    • 0% Interest
    • No Annual Fee
    • Guaranteed Approval
    • No Credit Check
    • No Foreign Transaction Fee
    • Gas
    • Students
  • Debt
    • List of Collection Agencies
  • Loans
  • About Us
  • 24/7 Support:

    323-649-8707

We hope this template helps you achieve your goals.

Would you please review us?

A review would mean a lot to us — and takes less than 20 seconds. Let us know what you think. Thanks!

Leave My Review

What you’ll get

  • Assess

    Fill in your information and we will securely pull your TransUnion credit report.

  • Address

    We challenge inaccurate negative items with the bureaus and your creditors.

  • Advise

    We will give you advice for how you can improve your credit. Don’t want to wait? Call us now.

Don’t want to wait? Call us!

Monday to Friday, 10AM - 7PM EST

FinanceJar

Get a FREE 5-minute credit consultation.

Get a credit improvement plan that works for you with 1 phone call.

What you’ll get

1
Assess

Fill in your information and we will securely pull your TransUnion credit report.

2
Address

We challenge inaccurate negative items with the bureaus and your creditors.

3
Advise

We will give you advice for how you can improve your credit. Don’t want to wait? Call us now.

This is completely secure and won’t hurt your credit score.

By clicking "Submit" I agree by electronic signature to: (1) be contacted about credit repair or credit repair marketing by a live agent, artificial or prerecorded voice and SMS text at my residential or cellular number, dialed manually or by autodialer, and by email (consent to be contacted is not a condition to purchase services); and (2) the Privacy Policy and Terms of Use.

Don’t want to wait? Call (888) 859-0871 now

FinanceJar

Advertising Disclosure

Some of our articles feature links to our partners, who compensate us when you click them. This may affect the products and services that we showcase in our articles and how we place and order them. It does not affect our evaluations of them, which our writers and editors create independently, without considering our relationships with our partners.

FinanceJar

Editorial Standards

We promise to always deliver the best financial advice that we can. That’s our first priority, and we take it seriously.

To ensure that our articles and reviews are objective and unbiased, our writers and editors operate independently from our advertisers and affiliates. Our writers do not take FinanceJar’s relationship with its affiliates into consideration when writing their reviews and articles.

Everything we publish is as accurate and as complete as we can make it. All of our articles undergo several rounds of fact-checking before we publish them, and we do our best to keep them as no-nonsense and jargon-free as possible while still delivering the information that you need.

We know that taking financial advice from us requires a lot of trust on your part. We’re grateful for that trust, and we won’t abuse it. Learn more about our editorial standards.

FinanceJar

How We Make Money

FinanceJar partners with other companies in the credit and finance industry, such as credit card issuers and credit repair companies.

We make money through advertising. Our pages feature links to our partners’ websites. If you click on one of those links, we get paid.

The links to our partners are always clearly marked. You’ll always be able to tell what you’re clicking. We’ll never try to trick you into clicking anything you’re not genuinely interested in.

That’s the only way that we make money. We don’t accept compensation in exchange for reviews or articles, and we don’t directly sell any products or services ourselves. Our editorial team operates independently (with no influence from our affiliates or our advertising team) so as to avoid compromising the objectivity of our reviews. Learn more about how we make money.