An unsecured personal loan is an installment loan that is not backed by collateral such as a house or car. It differs from a mortgage, car loan, or secured loan in that the lender cannot directly seize your assets if you fail to pay back the loan. Your credit score still will be damaged if you default, though.

What lenders are looking for: Any reputable lender will check your credit history and ask about your income and debt when deciding whether to offer you a loan. Your credit history directly affects the interest rate you are offered, and so does your ability to repay the loan. Rates do vary from lender to lender, but here is what interest rates on personal loans look like, on average:

Someone with poor or average credit may be able to get an unsecured personal loan on the strength of a steady income and low debt levels. Someone with excellent credit and a low debt-to-income ratio may be offered interest rates as low as those seen on secured loans.

Almost all lenders will require you to be 18 or older and a legal U.S. resident, with a verifiable bank account and not in bankruptcy or foreclosure.

Pros of unsecured personal loans

  • Improved credit score. You may improve your credit score by moving revolving credit card debt to an installment loan, because you lower your credit utilization ratio and diversify your types of debt.

Cons of unsecured personal loans

  • Higher interest rates than secured loans and (some) credit cards. If you have excellent credit and can pay off the debt in 12 to 18 months, you can likely get a credit card that has 0% interest on balance transfers for a year or longer. Alternatively, if you are a homeowner, home equity loans often have lower interest rates than personal loans. But be cautious; you’re risking your house by putting it up as collateral.
  • Extended application process. The approval process for a loan can last a few days and may require more information than that needed to get a credit card.
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