More than 20 million Americans have personal loans, 45 percent of which don’t require collateral and are named unsecured. The most popular type of such credit is student loans meant to pay tuition – the number of such borrowings among students across America reached $1.75 trillion, an average of $28,950 per student.
The idea of not having to list your house, car, or other expensive assets as collateral sounds attractive, and you have to pay for education anyway. But are such loans as profitable as it seems?
Let’s analyze the main aspects to understand who and in what situations is better to use these loans, and let’s start with the definition of the concept itself.
What is an Unsecured Loan?
Usually, when you get money from a financial institution, you sign an agreement stating the lender can take the collateral (car, house, garage, land, etc.) in its possession. The reason for this is to give the bank a guarantee that the money borrowed will be returned.
However, imagine that you want to obtain money from a bank, but you don’t have any expensive property that could serve as such a guarantee. What should you do in such a situation?
You can get such a loan from a bank, credit union, or borrower.
These loans are also called “signature loans” because all you need to do to get the money is to put your signature; nothing else is required. However, there are many more requirements than it first appears because these loans have two underlying traps:
- The requirements to get it;
- And high-interest rates.
How an unsecured loan works
Why do you think financial institutions agree to give a 2500 loan today without collateral, knowing that you may not be able to pay them back?
Many say that the main advantage of this type of credit is that if you stop paying back the loan, the bank won’ take your property to cover its costs. However, this issue is not so simple either, and financial institutions have a mechanism they can use to get their money back. Moreover, it is not so easy to get such a loan.
If a bank cannot guarantee itself with collateral, it tries to protect its money in other ways, including:
- Selecting the most reliable borrowers. These loans are only available to people with a high credit score and stable income.
- Less favorable terms for borrowers.
Otherwise, an unsecured loan works just like any other loan, but various types differ in purpose and terms.
Read More: What Is An Unsecured Personal Loan?
Types of unsecured loans
There are a few basic types of them:
- Student loans
Since education in America is expensive, almost all students borrow money to pay for it. To get such a loan, you must enter information about yourself and your parents (they can act as guarantors in some cases) and sign a promissory note. This means you agree to pay back the money and all its interest, so don’t worry; it’s not about collateral.
- Personal Loans
Usually, the purpose of these credits is to buy something expensive, like a phone, a car, or a wedding dress. You take a considerable amount from the bank, divide it over several years, and pay fixed monthly payments.
You do not use your valuable items as collateral for a personal loan, but you pay a higher interest and a service fee and you are required to pay the money back in a shorter period than in the case of secured loans.
- Credit Cards
This is a type of revolving credit. It means you don’t ask for credit on every personal purchase but simply have a certain amount of money you borrow from the lender. You can use your credit card for years; the only condition is that you pay back all your loans on time.
You pay a higher interest rate for using the money all the time than you would on a personal loan (exceptions may include cards with 0% introductory interest rates, grace periods, and rewards). However, a credit card remains one of the most popular ways to build a credit history.
Unsecured vs. secured Loan
Secured and unsecured loans work on the same principle – you borrow money at a specific annual interest rate, the amount is divided into fixed payments, and you pay them typically monthly.
The difference between the two becomes significant only regarding the possible failure to repay the funds received.
First, a secured loan can only be suitable when you have some property that can serve as collateral and guarantee you will repay the loan.
They come with a lower interest rate and are great for big long-term loans, like renovating a house, buying an apartment, or a car.
In contrast, if you don’t have this kind of property, the only option is an unsecured loan. This borrowing is for smaller amounts, a shorter term, and a higher interest rate.
The last factor to consider is your credit history. Banks refuse 69% of applicants for an unsecured loan because of a low credit score. So if you can’t get such a loan, it’s worth considering providing the bank with collateral. In any case, you can use this property even if it is listed as collateral on a loan.
Pros of unsecured loans
Let’s summarize our comparison of credits and list the merits of such loans:
1. All you need to get money is a high credit score and good credit history.
You don’t have to ask your family to act as guarantors for the loan, provide many documents, or wait for months – if you have a good credit record, you will get the money quickly.
2. You don’t risk your assets.
And if you don’t have any, you can still get a loan.
3. It’s easier to get funds.
Since you don’t provide your property as collateral, you don’t have to spend time waiting for it to be evaluated. Instead, you simply submit all the documents and wait for your application to be approved.
4. You can get money immediately, even online.
Many apps provide unsecured loans, so this is an ideal option when you need money for just a few weeks or months.
Cons of unsecured loans
Generally accepted disadvantages of such loans are:
1. Strict requirements.
You need an excellent credit history to get a large loan at an adequate interest rate. But, of course, here we are not talking about payday loans, which are also unsecured but do not require a credit history check because of the high annual interest rate.
2. Small amounts.
The maximum size of this credit at most financial institutions is $50,000. Therefore, you must choose another option if you want to buy something more expensive.
3. Smaller term.
Since you don’t provide the bank with a property that could guarantee that the money will be repaid on time, it’ll do everything to protect itself, including shortening the repayment period from a few months to a few years.
4. High-interest rate.
The average APR on such credit is 16%, while the rate on a secured loan ranges from 3% to 6%.
If you fail to repay the loan, it will negatively impact your history. Also, the bank can go to court and force you to give the money back, so make sure you’ll pay it off before you get the loan.
Who should get an unsecured loan?
This kind of borrowing is best for people with a high credit score without any property that could be put down as collateral for the loan. The bank can still make you pay the money back; the only difference is that in the case of unsecured loans, it will take a little longer and require court involvement.
Another situation where an unsecured loan may be the only option is an urgent need for money. For example, if you have a medical bill to pay off or a car to be fixed tomorrow and know you’ll repay the money with your next paycheck, there is no reason to take out a secured loan.
Of course, as with any other type of loan, you should pay the most attention to the terms of receiving and returning the money. Make sure that the interest rate on the loan is not too high and that you won’t fall into a debt trap. Carefully read the agreement to see whether there are any penalties and hidden fees in case you suddenly do not pay the money back on time.
And, of course, never take out credit if you are not sure you can pay back the total amount with interest within the specified term.
Requirements for an unsecured loan
It is much easier to apply for such a loan because you skip the stage of property evaluation, which should serve as collateral. Because of this, you can apply for money entirely online.
To do this, you must fill out a prequalified quote with basic information about you as a lender. This includes your name, address, date of birth, Social Security number, credit purpose and amount, and annual income.
The financial institution will then begin checking your credit history and credit score.
If you meet the bank’s requirements, they will send you a confirmation, along with the loan terms and conditions of the agreement. Once you have confirmed that everything works for you and you have signed the contract, the bank will proceed to transfer your money. This usually takes from several minutes to a couple of days.
As we said, only people with high credit scores can get an unsecured loan. As soon as you apply for a loan, the bank starts a hard check on your credit history, which takes about 5-10 points off your credit score. So before applying, check to see if you meet the bank’s requirements and save those valuable points.
To get an unsecured loan, you need to have a credit score of at least 640, but people above 720 have the best chance (they also get better loan terms).
Also, remember that if you don’t pay back the loan, the bank will report it to the credit bureau, and your credit score will be damaged.
When you apply for an unsecured loan for personal purposes, you specify the amount of your annual income. Why do this? Because this information helps the bank estimate you as a potential borrower.
Minimum income requirements vary by lender, terms, and credit amount. For example, if you want to qualify for up to $50,000, your minimum annual income must be $20,000 or more at some banks and $45,000 or more at others.
To prove your income, you may be asked for an account statement, a letter from your employer, or recent tax returns. However, many banks do not look at your annual income; they check the borrower’s reliability by another parameter, the debt-to-income ratio.
Banks use this metric to determine how much of your monthly income you have to pay on different loans. If it is less than 36 percent, most banks will approve money; if it is less, they usually will not. However, there are also financial institutions ready to lend to individuals with a ratio up to 50 percent but at a higher interest rate.
How can you calculate your DTI? It takes a few steps:
- First, count all your monthly credit charges (including student loans, mortgage or rent, car payments, etc.). Let’s pretend that this amount is $1800 to clarify how to count.
- Next, divide this number by your gross monthly income, the amount you earn before taxes. For example, let your gross monthly income be $6000, that is 1800/6000=0.3.
- Multiply that number by 100% to get your DTI. In our example, 0.3*100%=30% is the acceptable level of DTI for getting another credit.
Let’s start by determining what can serve as collateral. The most common ones are houses, cars, deposits in banks or investment accounts, inventory, and personal property on paper.
Imagine that you go to the bank to get an unsecured loan, and an employee asks you if you have any of the above items in your possession, such as a deposit or an investment account. Does that mean the bank will be able to use it as collateral?
No, remain calm. If you are asked about your personal property, it doesn’t mean you are listing it as collateral. It is simply that any financial institution will feel safer if it finds that you have savings, which means you are a reliable borrower, and you can be approved for a loan.
How to apply for an unsecured loan
As with any loan, you must fill out an application before getting money. This is where the lending process begins.
Note that each lender has its requirements for the borrower and its form for prequalification, but we will try to list all the possible questions for you as a prospective borrower.
What documents do you need to fill out a pre-qualified form?
- Proof of Identity.
This can be your driver’s license, birth certificate, passport, or any other document that shows your age and citizenship because you must be a U.S. citizen over 18.
Proof of your residency.
Many lenders want to know that you have a permanent place of residence. You can give them your latest utility bill, rental agreement, home insurance, or any other document showing your information and an exact address.
- Proof of income.
The most popular option is a bank statement. However, if you don’t want to provide any documents, simply indicate your employer’s contact information – the bank will contact them to confirm your income and employment.
These are all the documents you may need to fill out the form. All other information, including your credit history and credit account, is available to the banks in their system; it is unnecessary to specify.
Best unsecured loan options for 2023
To help you understand the credit terms offered by different financial institutions, we’ve compiled the top 5 choices and detailed information below.
Be aware that this is only an estimate, and your particular loan’s terms may differ because they depend primarily on your credit history.
Best unsecured personal loan for fair credit — Best Egg
Best Egg is an online platform that provides loans from $2,000 to $50,000 for 36 months or longer. It works through Cross River Bank and Blue Ridge Bank with American residents over 18.
The average APR in this company is as high as 19%, the most reliable borrowers can get money starting at 6%, and the most unprofitable APR is 36%.
To obtain money through this platform, you must have a minimum credit score of 640, and it should be above 700 if you want better chances. In addition, regardless of your credit terms, you must pay up to 5.99% origination fees.
In general, judging by customer reviews, the platform is best suited for people who want to get money quickly for personal purposes, such as buying expensive home electronics or renovating their homes. Note that this app does not work in some U.S. states, such as West Virginia, Iowa, Vermont, etc.
Let’s summarize our analysis with the company’s benefits:
- It offers a large selection of loans for people with high credit scores;
- You can get from $2,000 to $50,000 online.
On the other side, it has a few drawbacks:
- Relatively high annual rate – up to 36%.
- You must pay origination fees of up to 6% of the entire credit amount.
Best unsecured personal loan for refinancing — Figure
Figure is a company that provides online personal loans for $5,000 to $50,000. Platform users note that it is one of the best options for those who want to refinance their borrowings because Figure offers a reasonable interest rate of 5.75% to 31.44%.
To get a loan from this company, you must have a credit score of 680 or more. Figure looks at your DTI and credit record and asks for proof of employment or income to determine the best terms for you.
- There is a large selection of loans and the possibility of borrowing up to $50,000 for personal purposes and refinancing.
- It has lower interest rates compared to other similar lenders.
- You’ll get the money within a day of approval.
- You can repay the loan earlier or later without penalties or additional fees.
Its disadvantages are the following:
- First, there are only two loan options: 36-month or 60-month.
- In addition, you have to pay up to a 5% origination fee.
Best unsecured personal loan with quick approval — Old National Bank
This is one of the best lenders, according to users, 99% of borrowers recommend this bank, and its rating on popular platforms reaches 4.9/5 with 2500+ reviews.
The bank’s most significant advantage is excellent loan rates, ranging from 8.12% to 17.51%. If you want to receive cash here, count on $5,000 to $25,000.
The slight problem is that the bank does not say what credit score you must have if you want to get a loan. The only thing you can find on their website is that your credit record must not contain bankruptcies, loan defaults, or other major credit issues.
Every applicant must provide proof of income and 12 months’ worth of employment history.
This bank is best suited for those who want a long-term loan quickly because it transfers the money the day after approval.
The pros of the Old National Bank are as follows:
- It offers a low-interest rate on personal loans.
- You can get the money within one business day.
The main disadvantage is a hard check on your credit history. You will not be approved for a loan if you have had any major credit issues in your past. Moreover, you must have at least five years of credit history.
Best unsecured personal loan with a variety of terms — Marcus by Goldman Sachs®
This company offers unsecured personal loans from $3,500 to $40,000 for 3-5 years. It works through Goldman Sachs Bank USA and provides money within two business days of approval of your application.
You can borrow from Marcus for personal purposes, including paying for vacations or refinancing existing loans. The minimum loan rate is 6.99%, and the maximum annual rate is 19.99%.
Marcus has one unique service that allows you to skip one monthly payment a year from the date of your loan if all 12 previous payments were made on time. In this case, your loan will be extended for one month without additional fees.
Notice that you must have a credit score of at least 670 to qualify for a loan.
The main advantages of this company are as follows:
- You don’t have to pay any additional fees.
- The platform offers low personal loan rates.
- You can apply for a loan even from your phone.
- There is an opportunity to extend the loan for free for a month.
One disadvantage of this company is that you need a good credit record to receive funds.
Best unsecured personal loan for debt repayment — Happy Money
This organization is not a financial institution but a platform that finds the best personal loans fair creditfor those who want to pay off their debts. It was founded in 2009 and has helped its clients pay over $4 million in debt.
The idea is simple – if you need a loan from $5,000-$40,000 and have low credit scores (550-600 points), you can find a lender through this platform.
The company allows you to take out a loan at a reasonably low-interest rate, from 5.99% to 24.99%. In addition, if you don’t pay back the loan on time, you won’t have to pay late fees, which can negatively affect your credit history.
Users point out several advantages of this company:
- It gives you the option to change your personal loan payment date.
- You do not have to pay late fees.
- You can get a loan at a very favorable interest rate.
- You choose the terms of your personal loan and the lender.
- The company reports to all credit bureaus to help you improve your credit history.
The only minus of this company is the obligation for all lenders to pay the origination fee.
Our selection requirements
Before choosing these companies to review in our article, we thoroughly analyzed dozens of competing financial institutions. We checked them according to the following criteria:
- APR. We understand that high-interest rates often lead people into the credit trap, so we found the companies offering the most favorable terms for you.
- Loan Amounts. We have tried to select financial institutions that allow you to get a personal loan for both large and small amounts. So now you have an option for a short-term loan of $2,000 and a long-term loan of up to $50,000.
- Min. Credit Score. Hard credit checks take points off your credit score. We’ve outlined what score you must get credit – this will help you qualify for a loan.
- Overview. We researched customer reviews to see which category of people each financial institution is the best option and what pros and cons they noticed while using such services.
An unsecured loan is an opportunity to get money without collateral. However, since there is no guarantee that you will pay the loan on time, financial institutions charge higher interest rates on such loans – on average, 6% to 36%.
Because of this, they are less profitable than secured loans and are only recommended for people who have no collateral or are in urgent need of money.
The last thing to know about unsecured loans is the requirements. To get the money, most often, you will have to provide proof of identity, address, and income. In addition, you need to have a high credit score – an average of 650-700 points.
Be careful and do not take credit unless you are sure you will not pay back the money on time – it will affect your credit history negatively.
Sources Used in Research for the Article:
- Personal Loans: Secured vs. Unsecured, National Credit Union Administration,
- What is a debt-to-income ratio, Consumer Financial Protection Bureau (CFPB), https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
- Payday loans key terms, Consumer Financial Protection Bureau (CFPB), https://www.consumerfinance.gov/consumer-tools/payday-loans/answers/key-terms/