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At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Unsecured loans are debt products offered by banks, credit unions and online lenders that aren’t backed by collateral. They include , and revolving credit such as . You’ll generally need good or excellent credit and a steady source of income to qualify for the best loan terms, and you’re free to use the loan proceeds however you see fit in most instances What is an unsecured loan
Unsecured loans are loans that don’t require collateral. They’re also referred to as signature loans because a signature is all that’s needed if you meet the lender’s borrowing requirements. Because lenders take on more risk when loans aren’t backed by collateral, they might charge higher interest rates and require good or excellent credit. If a borrower stops making payments and defaults on the unsecured loan, there’s no collateral for the lender to take to recover the outstanding debt. For example, let’s say a borrower becomes unemployed and can’t repay their unsecured personal loan and unsecured credit card debt. When the loan accounts go into default, the borrower’s credit will be adversely affected. In this situation, lenders might decide to bear the financial loss. They can also pursue repayment of the debt through a court judgment, but they can’t seize a debtor’s assets without going through the legal process. Types of unsecured loans
There are several types of unsecured loans to choose from. However, the most popular options are personal loans, student loans and credit cards. As the name implies, student loans are designed to help offset the costs of higher education. Credit cards can be used to make everyday purchases or cover unexpected expenses until you get back on track financially. Personal loans generally don’t come with restrictions on how the funds can be used. So, you can borrow funds if you’re dealing with an emergency or to meet pressing financial goals. Some lenders also market these debt products as home improvement loans, wedding loans or debt consolidation goals, but they operate the same as traditional personal loans. Pros of unsecured loans
No collateral required Fast access to funds No risk of losing assets Fewer borrowing restrictions Competitive rates for those with strong credit Cons of unsecured loans
Risk of losing assets Might have lower borrowing limits for those with low credit scores Might have higher interest rates for those with low credit scores Harder to get approved Get pre-qualified
Unsecured loans vs secured loans
Secured loans differ from unsecured loans in that secured loans always require collateral. If a borrower won’t agree to provide an asset as insurance, the lender won’t approve a secured loan. This loan type exists for a variety of financing options, including mortgages, car loans, home equity lines of credit and some types of personal loans. Borrowers will likely not encounter unsecured mortgages or car loans since the home or vehicle is always used as collateral for those loan types. Getting approved for a secured loan can be easier than getting an unsecured loan because secured loans pose less financial risk for lenders. Since they require collateral, they typically have more competitive interest rates than unsecured loans. How do unsecured loans work
Unsecured loans can be either for no-collateral , such as unsecured personal loans, or unsecured revolving lines of credit, such as unsecured credit cards. When you submit an application, the lender will check your creditworthiness and consider factors such as your income, savings and debt to see if you qualify. Although unsecured loans and lines of credit are only guaranteed by your promise to pay, the lender still has recourse if you fail to make payments. The lender can send your account to a collection agency, take you to court to garnish your wages and report your late payments to the credit bureaus. These actions will cause your credit scores to drop Who should get an unsecured loan
Whether an unsecured loan is the right option depends on the borrower’s financial situation and the purpose for the funds. Borrowers who need money but aren’t comfortable pledging collateral to secure a loan can consider an unsecured loan when: Planning for a large purchase. Taking on debt can put a strain on your finances, but if you need funds for a big upcoming expense, an unsecured loan can help. They have good credit. Having a high credit score unlocks more favorable unsecured loan terms and interest rates. They have reliable income. Although collateral isn’t needed for an unsecured loan, you’ll need steady income to repay the debt and avoid defaulting on the loan. Unpaid secured loans can negatively affect your credit. Consolidating debt. Unsecured loans are useful as tools that can make debt repayment simpler. This strategy can also help borrowers save money if they qualify for lower interest rates. Qualifications for an unsecured loan
To limit their risk, lenders want to be reasonably sure you can repay the loan. Lenders measure that risk by checking a few factors, so they may ask about the following information when you apply for an unsecured loan (and tailor the loan terms according to your answers): Your credit
Lenders to see how you’ve managed loans and credit cards in the past. Generally, they look for a history of responsible credit use (typically one or more years), , low credit card balances and a . They’ll also check your , which are calculated based on the information in your credit reports. Consumers with credit scores around 700 or higher usually qualify for the best interest rates. Your income
Knowing you have the means to meet your financial obligations, including the loan payments, lowers the lender’s risk. The lender may ask to see proof of stable, sufficient income, such as a current pay stub. Your debt-to-income ratio
To calculate your , add all your monthly debt payments and divide that total by your gross monthly income. For example, if you have $500 worth of existing debt payments and $2,000 in gross income each month, then your DTI is $500 / $2,000 = 0.25 or 25 percent. Lenders use this number to measure your ability to repay a loan. The lower the ratio, the better. Every lender will have a different requirement for your DTI, but the maximum is usually no higher than 43 percent. Assets
Although unsecured loans don’t require collateral, the lender may want to know that you have savings. They know you’re less likely to miss loan payments when you’re prepared to cover financial emergencies. How to apply for an unsecured loan
If an unsecured loan is right for you, applying takes several simple steps: Determine how much you need. Only borrow what you need, even if the lender approves you for a higher amount. Research top lenders. You can find unsecured loans through national and local banks, credit unions and online lenders. Compare unsecured loan offers. Some lenders offer prequalification so you can before you apply. Look at each lender’s interest rates, fees, loan terms and amounts and special features. Submit an application. After checking preliminary offers and selecting your preferred lender, complete a formal loan application. This can be done online or in person through most lenders. Provide documentation. If the lender asks for additional documentation, submit it in a timely manner. This might come up if you don’t have strong credit, for example. Accept loan funds. If you’re approved, the lender will tell you how you’ll receive the loan funds. If it’s an installment loan, you’ll receive the money as a lump sum. For revolving loans, such as a credit card, the lender will issue you a credit card to draw funds from the account as needed. Whenever you take out an unsecured loan, make sure you repay it on time to avoid damaging your credit score. Learn more
Get pre-qualified
SHARE: Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Related Articles