Unsecured Loans: How to Borrow Without Collateral (2024)

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• Unsecured personal loans and credit cards don't require any collateral.
• Secured loans, like a mortgage or auto loan, require you to pledge an asset as collateral.
• Before you borrow money, take time to explore both secured and unsecured options.

Consumers who need to borrow money have a wide range of loan options to consider. However, all loans, lines of credit, and other financing methods fall into one of two categories — unsecured or secured debts.

While both secured and unsecured loans and lines of credit could help you reach your goals, there is one main factor that sets them apart. Where secured loans require collateral, unsecured financing methods don't require any collateral at all.

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What is an unsecured loan?

Unsecured loans and financial products can come in many different forms, but the underlying premise and agreement is the same. Consumers are not required to put down any of their assets to obtain an unsecured loan, but they do have to agree to repay the monies they borrow — plus interest, of course.

Without any collateral requirement at the beginning of the loan, unsecured debts have more stringent requirements to qualify. The best personal loan rates you may have access to depends on your credit score. You typically need good or excellent credit to qualify for unsecured loans with the best interest rates and loan terms. You also need to be able to illustrate your ability to repay and be able to prove you have a reasonable amount of liabilities compared to your income.

Types of unsecured loans

Unsecured debt can come in many forms, the most common being:

• Unsecured credit cards (the vast majority of credit cards)
• Most personal loans
• Student loans

Other debts that are considered unsecured include telephone and electric bills (and other utilities), court judgments, gym memberships, and even medical bills. Unsecured debts are any type of debt that is not secured by an asset.

Advantages of unsecured loans and lines of credit:

• When you apply for an unsecured loan or credit card, you won't have to put down a cash deposit as collateral.
• If you default on an unsecured debt, the bank won't be able to seize your assets.
• The application process is usually quick and painless. You can apply for unsecured personal loans and credit cards online and from the comfort of your home.

Disadvantages of unsecured loans and lines of credit:

• While the bank cannot seize your assets if you default on an unsecured debt, they can try to obtain a judgment against you. Defaulting on your loan will also result in severe damage to your credit score that may be difficult to overcome.
• Requirements for approval are tighter. You need good or excellent credit (usually a FICO score of 740+) and a solid work history to qualify for unsecured loans and credit cards with the best interest rates, terms, and perks. You may be able to qualify for some unsecured loans with fair credit, but you'll typically pay a higher interest rate and more fees.
• Interest rates tend to be higher on unsecured debts when compared to some types of secured debts.

What is a secured loan?

Secured debts are any type of debt that is held with an underlying form of collateral. This could be a cash deposit you put down, an automobile, your home, stock you own, or any other asset that has significant value.

Secured debts are typically considered lower-risk for the lender since they have an asset to seize in the event the borrower stops making payments. For that reason, secured debts often have lower interest rates than unsecured alternatives.

Secured loans and lines of credit can work very differently depending on the type of secured debt you're dealing with. The most common types include:

• Secured credit cards
• Secured personal loans
• Home equity loans
• Home Equity Lines of Credit (HELOCs)
• Auto loans
• Mortgages

Unsecured loans vs. secured loans

Before you borrow money, take out a line of credit, or apply for a credit card, make sure you know the difference between secured and unsecured debts. While either can help you reach your goals, the presence or absence of collateral is an important consideration that should be decided ahead of time.

Whatever you do, take the time to compare loan options and read the fine print before you sign on the dotted line for any type of loan. If there are any unsavory terms and conditions to be found, they will be tucked away in the fine print.

Obtaining an unsecured loan

Getting approved for an unsecured loan can be more difficult than a loan backed by collateral.

Since the lender is assessing the risk of lending to you based exclusively on your creditworthiness, your credit score will play a big part in whether you're qualified to borrow as well as the interest rate you'll pay, the amount you can borrow, and the term of the loan if you're approved.

Most lenders like to see a credit score on the mid-600s. The higher your credit score, the less you're overall cost of borrowing will be. Other key factors affecting your application for a loan include your income and employment history, debt-to-income ratio, the amount you want to borrow, and how long you want to take to repay it.

Frequently asked questions