Unsecured loans: What are they, and how do they work?
Unsecured loans are loans that don’t require any collateral. That means you don’t have to pledge an asset, like a house or car, to qualify for the loan. Instead, approval is based on factors such as your credit scores, income and overall ability to repay the debt.
Learn more about how unsecured loans work and how to get one.
What you’ll learn:
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Unsecured loans don’t require collateral.
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Without collateral, unsecured loans often have higher interest rates than secured loans.
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Creditworthiness might take on more importance when lenders review applications for unsecured loans.
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Some credit cards, some personal loans and student loans are examples of unsecured loans.
What is an unsecured loan?
Unsecured loan approval depends on your creditworthiness and doesn’t require collateral. In some cases, unsecured loans may have higher interest rates and stricter eligibility requirements than secured loans. But that’s not always the case. Unsecured credit cards, for example, often have lower interest rates than secured credit cards. It depends on the lender, applicant and loan type.
What’s the difference between a secured and an unsecured loan?
The difference between secured and unsecured debt is found in how a borrower is approved for a loan and whether collateral is required:
| Secured loan | Unsecured loan | |
| Collateral requirements | Required (can include physical assets like a car or house, or liquid assets such as cash or investments) | Not required |
| Lender's recourse if borrower defaults | Can take the collateral to cover losses | Not applicable (no collateral to seize) |
| Loan approval criteria | Assets secure the loan |
Loan is based on the borrower’s creditworthiness |
How do unsecured loans work?
Typically, when someone applies for an unsecured loan, the lender will consider factors like their credit scores and credit reports to assess their creditworthiness. Creditworthiness is a measure of how likely someone is to pay back a loan on time.
Because unsecured loans aren’t backed by collateral, creditworthiness takes on additional importance when the lender decides whether to approve or deny unsecured loan applications. If the application is approved, the lender also sets the loan terms, including the payment schedule and interest rate.
Generally, people with higher credit scores are more likely to get approved and receive better terms. But lending decisions are complex, and many factors can come into play. Plus, loan type can play a big part. Student loans may not have the same credit score requirements as unsecured credit cards, for example. To find out more about a particular loan, read its eligibility criteria and terms in full.
Types of unsecured loans
Personal loans, student loans and credit cards are common types of unsecured loans, which don’t require collateral. Unsecured loans can be split into two basic categories: installment loans and revolving credit accounts.
Installment loans give the borrower an up-front lump sum that’s paid off in regular installments over a set period of time. Here are a couple of examples of unsecured installment loans:
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Student loans
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Unsecured personal loans
Revolving credit accounts can be used and paid down repeatedly, up to their credit limit, as long as the account remains open and in good standing. They include:
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Unsecured credit cards
What to consider before getting an unsecured loan
Before taking out an unsecured loan, review your finances and the loan terms carefully to be sure you can manage the payments without creating a financial strain. As with any other kind of debt, if you make late payments or default on an unsecured loan, it can hurt your credit scores. And the lender can send the loan to collections or sue you to recoup the unpaid debt.
You can typically get an unsecured loan from places like banks, credit unions and online lenders. Each lender has its own application process. But here are a few general guidelines on what to consider before getting an unsecured loan:
1. Eligibility requirements
Before moving forward with any loan, it can help to read up on that loan’s eligibility criteria to see whether you might qualify. Getting pre-qualified or pre-approved may help narrow down your options.
You may also want to check your credit scores to know where you stand. CreditWise from Capital One is a free tool that lets you monitor your credit and keep up with changes. The CreditWise Credit Simulator can even help you forecast how actions like applying for a loan or paying down your balance might affect your credit scores.
You can also visit AnnualCreditReport.com to get free copies of your credit reports from each of the three major credit bureaus.
2. Loan terms
Next, it’s time to take a closer look at the loan’s terms. Here are a few items to look into:
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Interest rates, including introductory offers
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Monthly payments
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Fees
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Loan term
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Payment schedule
These are just a few examples of items to look out for. Make sure to read the loan terms in full before applying.
3. Application requirements
Once you choose an unsecured loan, it’s time to submit your application. The process of applying for a loan may vary by lender and loan type. But generally, you’ll have to provide some personal information, such as your address, income and employer.
Unsecured loans FAQ
Here’s some more information about unsecured loans.
How hard is it to get an unsecured loan?
Whether it’s hard or easy to get an unsecured loan depends on a lot of different factors. Every unsecured loan is different. And loan terms and requirements can change, depending on the lender or the loan. In general, higher credit scores can make it easier to get approved for unsecured loans.
Who is eligible for an unsecured loan?
Lenders look at your credit history, income stability and debt-to-income ratio to determine whether you’re eligible for an unsecured loan. And while there isn’t a single, definitive answer for what credit score you need for an unsecured loan, having higher credit scores may help you qualify for more loans and better terms.
Is a payday loan secured or unsecured?
According to the Consumer Financial Protection Bureau (CFPB), payday loans don’t require collateral and are a type of unsecured debt. The CFPB also says that payday loans generally have high fees and interest rates, making them an expensive type of loan. They’re even illegal in some states.
Key takeaways: Unsecured loans
An unsecured loan is a type of debt that doesn’t require collateral. Unsecured credit cards, student loans and personal loans are a few common types of unsecured loans.
Capital One has secured and unsecured credit cards for people at many credit levels. You can check for pre-approved card offers before you apply. The process is quick and won’t hurt your credit scores.
