Summary:
An unsecured personal loan is a collateral-free loan that doesn't require you to pledge assets like your car or home. These loans typically have higher interest rates than secured loans but offer no risk of losing personal property.
Key Takeaways:
- Unsecured loans don't require collateral, making them accessible but typically more expensive
- Loan amounts typically range from $1,000-$100,000
- Common uses include debt consolidation, home improvements, and major purchases
- No risk of losing personal assets, unlike secured loans
Before diving into the specifics of an unsecured personal loan, let's revisit the basics: What Is an Unsecured Personal Loan? There are at least three things you should know about an unsecured personal loan:
- Unlike secured loans, unsecured personal loans do not require collateral, such as a car or laptop.
- They tend to be more available as loan options to people with stronger credit.
- The terms may be less favorable, but the lender won’t be legally able to seize your property if you don’t pay back the loan.
If you’re just starting your loan shopping, you’ll soon realize that there are two major
personal loan paths you can take: secured and unsecured.
Understanding the difference may help increase your chances of getting approved and get terms that are better for you.
Unsecured vs. Secured Loans: Which is Better?
Which loan you should get usually depends on your level of credit, distance to a physical lending branch, and your desired loan terms, among other factors.
But most people who opt to NOT get an
unsecured loan do so because interest rates are typically higher, and they can be harder to qualify for.
This is because collateral security makes lenders feel better about giving you money. Backing up your borrowing with collateral reduces the lenders’ risk which often equates to better loan terms for you.
Is a Personal Loan Secured or Unsecured?
Either one! In many cases, you have the option to choose whether your personal loan will be secured or unsecured.
However, if you’re looking for a loan online, note that not all types of secured loans will be available unless you can visit a physical branch. For instance, if you’re shopping for an
auto-secured loan that uses your car or truck as collateral, the lender will often want to physically see the vehicle first. That means your secured personal loan options may be limited to lenders with branches that are close to you, depending on what kind of collateral you choose.
How to Qualify for an Unsecured Personal Loan
There’s no single qualification process, and every lender is different.
But many lenders will let you
pre-qualify, so you can see if you might qualify without it affecting your credit score.
After that, you’ll likely have some forms to fill out and the lender will likely check your credit. If you’re approved, your funds should be on their way.
How Much Can You Borrow with an Unsecured Loan?
Unsecured personal loan amounts typically range from
$1,000 to $100,000, depending on:
- Your creditworthiness and income
- The lender's maximum limits
- Your debt-to-income ratio
- Your existing relationship with the lender
Benefits of Unsecured Loans
1. Flexibility: You can use the money for a variety of purposes, including bill consolidation, home improvement, or any major purchase.
2. Access to funds: As the applications are more straightforward than those of secured loans, they allow for easy access to funds.
3. No Collateral: With this, you don't have to give an asset as security, and therefore, you will not run the risk of losing that asset or property.
4. Building Credit: Paying off an unsecured loan in a responsible and timely manner will help to build your credit score over time.
Frequently Asked Questions About Unsecured Personal Loans
What happens if I default on an unsecured loan?
While lenders can't seize collateral, they can report missed payments to credit bureaus, pursue collection efforts, and potentially file lawsuits to recover the debt.
What's the difference between an unsecured loan and a credit card?
Both are unsecured, but personal loans offer fixed payments, set terms, and often lower interest rates than credit cards for large purchases.
Can I pay off an unsecured loan early?
Most lenders allow early repayment, though some charge prepayment penalties. Check your loan terms before applying.
Unsecured Personal Loans: Collateral-Free Borrowing
If you’re seeking a personal loan but aren’t thrilled about involving your car or other personal items, then an unsecured personal loan may be a good option.
The trade-offs, however, could be a less favorable interest rate and a decreased probability of qualifying.
Whatever you chose, it’s important to ask all of your questions before making a decision. Don’t be shy!