How unsecured loans work
An unsecured loan is a type of personal loan that doesn’t require collateral in exchange for funds. The lender instead relies on certain criteria for approval, like your credit score and credit history.
Kyle Enright, president of lending at Achieve, told us, “An unsecured loan is one that is not tied to an asset; it is issued on the basis of the borrower’s credit profile. These are typically called personal loans. They have no collateral (property) to back them up.”
An unsecured loan is one that is not tied to an asset; it is issued on the basis of the borrower’s credit profile. These are typically called personal loans. They have no collateral (property) to back them up.”
Unsecured loans are disbursed in a lump sum that you pay back with interest. They tend to be for smaller amounts, typically ranging from $1,000 to $100,000. Therefore, they’re ideal for short-term needs, such as emergency expenses or student loans.
They also tend to be shorter-term loans. For example, TD Bank offers loan terms from 36 to 60 months while PNC Bank offers terms from six to 60 months.
It’s typically more difficult to qualify for an unsecured loan because there’s no collateral for the lender to seize should you fail to repay the loan. Lenders often counter this risk with higher interest rates and stricter credit score requirements.
Should you fail to repay the loan as agreed, the lender can take action. There may not be any collateral to repossess, but the lender can still send your account to a debt collector or debt collection agency. It can also take your case to court, where a judge can order wage garnishment as a means of repayment.
That’s why it’s so important to always make your payments on time and in full to avoid future repercussions.
Fixed vs. variable interest rates for unsecured loans
Most unsecured loans have fixed interest rates, meaning that your rate is set from the beginning of your loan term and will not change. However, some unsecured loan types, notably credit cards, may feature variable interest rates that adjust as market conditions fluctuate.
Fixed-rate loans offer predictable monthly payments, making them easier to plan and budget for than variable-rate loans. When you take out a fixed-rate loan, you know that your interest rate will never rise over the life of the loan, even if the going market rate begins to climb. The trade-off to this stability, of course, is that your rate will also never decrease.
Types of unsecured loans
There are several types of unsecured loans, which vary by purpose, term and interest rate.
- Personal loans can be used for a wide variety of borrower needs, such as debt consolidation or emergency home repairs.
- Medical loans cover medical costs you may incur from appointments, surgeries, procedures and other health-related expenses.
- Student loans can cover the cost of tuition, books and supplies.
- Credit cards are another form of unsecured loan, giving you access to a line of credit that you can borrow from and repay repeatedly.
What are unsecured loans used for?
Unsecured loans can be used for various purposes, from streamlining your monthly expenses to financing a major purchase or life event.
Debt consolidation
Unsecured loans are often used for debt consolidation as a way to pay off multiple balances. This allows you to combine multiple debts into a single loan with just one payment and, hopefully, a lower interest rate than you’re currently paying. Debt consolidation typically lowers your monthly payment, making repayment easier to manage.
Home renovations
An unsecured loan can be one way to finance home renovations or repairs. You don’t have to put your home up as collateral, like you would with a home equity line of credit or other secured loan. However, you may not be able to borrow as much as you could if you were to provide collateral.
Wedding expenses
With the average wedding costing $36,000 in 2026, it can be a serious undertaking to pay for one. From venue rentals to catering, and invitations to wedding attire, costs can quickly add up, and your savings may not be enough. That’s why many couples turn to an unsecured wedding loan to handle the costs.
Vacation
That family vacation may come at a high price, so some travelers look to an unsecured loan to finance their next trip. Vacation loans can help cover the costs of airfare, lodging, food and entertainment, giving you time to pay it off later after you return home.
New car
When you buy a new car, you have the option to skip dealer financing and obtain an unsecured loan on your own instead. With cash in hand, you may be able to negotiate a lower price for the vehicle, and you may also receive a lower interest rate than the dealership’s financing company offers.
Even better, you don’t have to put your car up as collateral with an unsecured loan. Keep in mind, however, that you could still lose your car if you fail to repay and a court orders the seizure of your assets.
Unsecured vs. secured loans
There are some notable differences between unsecured and secured loans.
Secured loans are the opposite of unsecured loans because they require collateral to obtain funds. Should a borrower fail to repay a secured loan, their collateral can be seized by the lender to offset the loss.
“A secured loan is secured by a tangible asset,” Enright explained. “Examples include vehicle loans, home mortgages, home equity lines of credit and home equity loans.”
Because the borrower provides collateral, you can typically get a larger amount with a secured loan than you can with an unsecured loan. That’s why secured loans are typically used to make larger purchases, such as buying a new house or car.
| Unsecured loans | Secured loans | |
|---|---|---|
| Collateral | No collateral required | Collateral required |
| Typical loan amount | $1,000 to $100,000 | Up to $1,000,000, depending on collateral value |
| Typical loan term | 12 to 60 months | 60 months or longer |
| Interest rates | Higher | Lower |
| Risk to personal assets | Low | High |
Pros and cons of unsecured loans
There are benefits and risks to using an unsecured loan.
Pros
- No collateral required
- Can be used for almost any purpose
- Quick application process
Cons
- Shorter repayment terms
- Higher interest rates
- More stringent credit requirements
Advantages of unsecured loans
- No collateral required: You don’t have to worry about risking a personal asset in exchange for your loan.
- Versatility: Unsecured loans can be used for almost any purpose, including emergency expenses, going on vacation, buying a new home or consolidating debt.
- Quick application process: Because there’s no collateral to review, the application process for an unsecured loan is significantly faster than that of a secured loan.
Disadvantages of unsecured loans
- Shorter repayment terms: Unsecured loans typically last up to 60 months, although you may find some lenders that offer longer terms.
- Higher interest rates: In the absence of collateral, lenders make up for the additional risk by requiring you to pay more interest.
- More stringent credit requirements: Lenders also have stricter requirements for credit scores and credit history due to the lack of collateral.
How to qualify for an unsecured loan
In order to qualify for an unsecured loan, borrowers must meet lender requirements. Although these requirements can be strict, there are steps you can take to improve your profile and increase your chances of approval.
Credit score for unsecured loans
Lenders generally look for good or excellent credit and a history of timely payments — particularly when approving higher amounts — so taking steps to demonstrate your creditworthiness can help. Check your credit report for errors, try working with your creditors to remove negative marks, pay any past due bills and keep up on your monthly payments.
Enright advised those interested in getting a loan to improve their credit as much as possible before applying: “Every lender is different and will have different requirements, but credit score largely determines whether an applicant gets approved, and if so, what rate the lender can offer.”
“In most cases, applicants with higher credit scores will receive the lowest rates,” he explained. “At Achieve Lending, for example, borrowers should have a minimum credit score of 620, but many lenders will lend to consumers with lower scores; they will just be offered a higher interest rate.”
If you don’t have good credit, you may still be able to qualify for an unsecured loan if you use a cosigner. Your cosigner assumes legal responsibility for the loan, meaning they’ll be held liable should you fail to repay.
Debt-to-income ratio for unsecured loans
Debt-to-income (DTI) ratio is another key consideration when applying for an unsecured loan. Your DTI ratio shows how much of your gross monthly income goes toward existing debt. This helps lenders determine whether or not you have too much debt to afford your loan.
“Higher ratios are associated with greater risk of missing or late payments on the loan,” said Enright.“At Achieve, we look for a debt-to-income ratio of 45% or lower.”
Additional lender requirements for unsecured loans
There are other factors a lender may consider:
- Income: Your lender will request income information to ensure you can make your monthly loan payments. You may need a minimum income to qualify, depending on your lender and the size of your loan.
- Age: Personal loans typically have minimum age requirements. Most financial institutions require borrowers to be at least 18 years old to apply.
- Credit history: Lenders also evaluate your credit history, typically looking for at least two or three years of active credit use, such as open credit cards or loans.
Most lenders outline basic loan requirements on their websites, so be sure to review them carefully before applying to see if you may qualify.
FAQ
What does unsecured mean in loans?
An unsecured loan is a type of personal loan that doesn’t require collateral and can be used for nearly any purpose.
What’s bad about an unsecured loan?
Because a borrower doesn’t provide collateral, an unsecured loan typically carries more stringent qualification requirements and higher interest rates than secured loans.
How do unsecured loans affect credit scores?
Making your loan payments in full and on time each month can help improve your credit score. However, failure to pay can damage your credit history and reduce your chances of approval for other loans in the future.
What are the common uses for unsecured loans?
Unsecured loans can be used for nearly any purpose, but they’re commonly used for debt consolidation, medical bills, home repairs and vacations.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- TD Bank, “Unsecured vs. Secured Loans: What's the Difference?” Accessed March 31, 2026.
- State of California Department of Financial Protection and Innovation, “Consumer Financial Education: Other Loans.” Accessed March 31, 2026.
- TD Bank, “Unsecured and Fixed-Rate Personal Loans.” Accessed March 31, 2026.
- PNC Bank, “Unsecured Personal Loan.” Accessed March 31, 2026.
- Experian, “What Happens if You Don't Pay Back a Personal Loan?” Accessed March 31, 2026.
- Citi, “Secured vs. Unsecured Loans.” Accessed March 31, 2026.
- SoFi, “A Guide to Unsecured Personal Loans.” Accessed March 31, 2026.
- Citi, “Fixed vs. Variable Rate Loans.” Accessed March 31, 2026.
- Zola, “2026 Wedding Trends: Zola's First Look Report.” Accessed March 31, 2026.
- Consumer Financial Protection Bureau, “Differentiating Between Secured and Unsecured Loans.” Accessed March 31, 2026.
- First Tech, “Certificate Secured Personal Loans.” Accessed March 31, 2026.
- TransUnion, “Unsecured vs. Secured Loan: Understanding the Differences.” Accessed March 31, 2026.
- Federal Trade Commission, “Cosigning a Loan FAQs.” Accessed March 31, 2026.
- Citi, “What is an Unsecured Personal Loan?” Accessed March 31, 2026.
