An unsecured personal loan is a loan that does not require the borrower to give something of value as collateral in case of default. The main tradeoff for the lack of collateral on unsecured personal loans is that they are more difficult to get than secured loans, which require collateral such as money in a bank account, an auto title or stocks.
Unsecured personal loans usually have minimum credit score requirements over 600, and approval depends entirely on your overall creditworthiness. On the other hand, it’s possible to get a secured personal loan with pretty much any credit score because the collateral requirement lowers the risk for the lender.
There are tons of lenders that offer unsecured personal loans, and all such loans function the same way. You get a lump sum upfront and pay it off over a set number of months. But unsecured personal loans are more complicated than just that, so let’s go through the main traits that define them.
Main Features of an Unsecured Personal Loan:
No collateral. The issuer does not require something of value in return for opening the loan.
Approval based on creditworthiness. The lender will base their decision on a number of different factors that make up “creditworthiness,” including an applicant’s credit score, income, employment and housing status, existing debts, number of recent credit inquiries and more.
Riskier for the lender. Lenders take on much more risk when they give out unsecured personal loans, as they have no immediate way to get repaid if you default. Instead, they must do something like sell your debt to a collections agency or take you to court.
Harder to get. You’ll likely need a credit score of at least 585 to get an unsecured personal loan, and many of the most popular lenders require scores of 660+.
Higher APRs. Because an unsecured personal loan is riskier for the lender than the borrower, you can expect to pay higher APRs than you would owe on a secured personal loan.
Many options. Tons of banks, credit unions and online lenders offer unsecured personal loans. Some of the biggest and most popular include American Express, Discover, Wells Fargo, Avant, LendingTree, Marcus by Goldman Sachs, and Prosper.
Installment payments. With an unsecured personal loan, you receive a lump sum from the lender, then pay it back in monthly installments. You will also have to pay interest, and perhaps an “origination fee” for processing the application. Secured personal loans work the same way, with the exception of the collateral.
Possible to pre-qualify. Many unsecured personal loan providers will allow you to “pre-qualify” for a loan before you apply. This will estimate your approval odds and potential rates. And instead of pre-qualifying for a single lender at a time, you can use WalletHub’s pre-qualification tool to check multiple lenders at once.
Can be used for anything. An unsecured personal loan has very few restrictions on what you can do with the funds. The only things you can’t use it for are illegal purposes, gambling and paying for college. This is also the case for secured personal loans.
All in all, an unsecured personal loan is a good borrowing option for people with credit scores over 600 who want an immediate lump sum to pay back over time. But it’s important to thoroughly compare your choices to make sure you get the best loan possible.
How to Qualify for an Unsecured Personal Loan
To be eligible for most unsecured personal loans, you will need to be either a U.S. citizen or a permanent resident with an SSN (sometimes you can substitute an ITIN). You’ll also need to have a steady income, though most loan providers do not disclose a minimum income requirement. And most importantly, you’ll need to meet the lender’s minimum credit score requirement (at least 585 for the easiest lenders; 660+ for the best options).
You can get a good idea of whether you’ll qualify with various lenders by using WalletHub’s free pre-qualification tool.
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