8 Pros and Cons of Unsecured Personal Loans

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Sometimes learning about money can feel like learning a new language.

At some point in your financial education, you might’ve seen the terms “secured loans” and “unsecured loans” and wondered what they mean.

Although they serve the same purpose — giving you money you don’t have — there are many differences between secured and unsecured loans.

What are unsecured loans?

The best way to explain an unsecured loan is to first describe its opposite: a secured loan.

Secured loans require “collateral” — something the bank can take if you fail to make payments. Well-known examples of secured loans include mortgages and car loans.

With an unsecured loan, on the other hand, there’s no collateral. If you don’t make your payments, the lender has to sue you for the money or sell your debt to a collection agency.

There are two types of unsecured loans:

  • Revolving: Like credit cards and personal lines of credit, these loans can be paid down and then spent again.
  • Term: Like peer-to-peer, student, and personal loans, these loans are for a set duration and monetary amount.

In this post, I’ll focus on personal loans — the broadest type of term unsecured loan.

Although lenders might ask what your personal loan is for, you can take one out for any reason: to buy a new dress, do home improvement projects, or go on a trip.

Because there’s no collateral, lenders will examine your credit history and debt and income levels and often perform a background check to determine if you qualify for the loan.

5 pros of unsecured loans

Now that you know what unsecured loans are, let’s go over the benefits.

1. You know the exact payments you’ll owe

If you take out an unsecured personal loan, you’ll know your monthly payments and repayment term upfront.

Most personal loans are available with terms between two and five years, and since most have fixed interest rates, there won’t be any surprises when it comes to paying the bill each month.

2. Quicker approval time

If you’ve ever applied for a mortgage, you know it’s not an easy process.

Because unsecured loans don’t involve collateral, the application and approval process often moves more quickly.

At LendingClub, for example, the application, approval, and funding process takes approximately seven days.

3. It can improve your credit score

Little-known fact: If you use a personal loan to pay off a credit card, it can increase your credit score.

That’s because paying off a credit card decreases your credit utilization ratio — the amount of available credit you’re using — which is a boon for your score.

4. More freedom

With an unsecured personal loan — or a credit card, for that matter — you’re free to use the money however you wish. Secured loans, on the other hand, require you to purchase a specific item with the money you receive.

While purchasing things you don’t need on credit generally isn’t a good practice, there is one financially savvy use of unsecured personal loans: paying off high-interest credit card debt.

If you can get a personal loan at a lower interest rate than your credit card, it could save you a significant amount of money.

Let’s say you owe $15,000 across three different credit cards that have interest rates of 22.00%, 25.00%, and 23.00%. If you paid them off with a personal loan at an interest rate of 19.00%, you’d not only have fewer payments to worry about — you’d also save $9,456 over three years.

Check your own numbers with our credit card consolidation calculator.

5. Fewer immediate consequences of default

Although you should never take out a loan if it’s likely you’ll default, unsecured loans have fewer immediate consequences if you don’t pay.

When you don’t pay your mortgage or auto loan, you risk losing the roof over your head or the wheels that get you to work. But when you default on an unsecured loan, the bank doesn’t have anything to take away.

Instead, it must sue you or send your loan to a collection agency. That’s far from a good thing, though; eventually, it will negatively affect your credit and could even lead to garnished wages.

3 cons of unsecured loans

Although unsecured loans have benefits, there are some drawbacks you need to know about.

1. Higher interest rates

Because there’s no collateral, banks need to make their investments worthwhile. So unsecured loans have higher interest rates than secured loans.

For people with average credit (640 to 679), the average personal loan APR is between 17.80% and 19.90%, according to ValuePenguin*.

If you have solid credit, then a zero-interest credit card might be a better option. Just make sure you pay the balance in full before the promotional period ends.

2. More difficult to obtain

Again, because there’s no collateral, lenders need to minimize the risk they accept — which they do by limiting unsecured personal loans to people with good credit.

In fact, if your credit score is below 580, you probably won’t find a personal loan that “makes financial sense,” according to Debt.org.

You can explore personal loans for people with fair credit or try improving your score with a credit builder loan. Alternatively, apply at your local credit union, which might be more willing to look at your complete financial picture than a big bank.

3. Lower borrowing limits and terms

Unlike a mortgage, which can run hundreds of thousands of dollars, personal loans have lower limits.

At Upstart, for example, personal loans range from $1,000 to $50,000, and at SoFi, they range from $5,000 to $100,000. For the upper limits, however, it’s safe to assume you’d need sterling credit.

The terms are also shorter. Whereas you could pay back a mortgage over the course of 25 years, most personal loans have terms between two and five years — which means much higher payments than you’d have with a longer-term loan.

Where to apply for unsecured loans

It pays to shop around for unsecured personal loans. Check rates at major banks, credit unions, and online institutions.

And whatever you do, watch out for scams. Any lender that wants to charge you an application fee or claims you can get preapproved for a loan is one to avoid.

Here are a few factors you can use to compare lenders:

  • Annual percentage rate (APR): When it comes to interest, lower is better.
  • Loan terms: Lenders offer different loan terms  most between two and five years. While a longer term will lower your payments, you’ll end up paying more in interest.
  • Fees: Compare origination, prepayment, and late payment fees.
  • Customer reviews: Look at Trustpilot or Credit Karma to see if customers are happy with the lender.

For a few of the banks we recommend, check out the list below.

*ValuePenguin is an affiliate of LendingTree, Student Loan Hero’s parent company.

Interested in a personal loan?

LendingTree allows you to compare rates from multiple lenders by filling out one easy form. Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.99% – 18.82%1 $5,000 to $100,000
6.53% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
compare rates on Lendingtree now
NMLS #1136: Terms & Conditions Apply
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 18.82% APR (with AutoPay). SoFi rate ranges are current as of March 19, 2020 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your creditworthiness, years of professional experience, income and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

Direct Deposit required for payroll.

Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5.  

    Rates and terms vary by state.

3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

Are unsecured loans a good idea?

Like most financial decisions, whether you should take out an unsecured personal loan is up to you.

If you have high-interest credit card debt and a personal loan offers a way to consolidate it at a lower rate, then it could be a smart choice for you.

And if you need money quickly, an unsecured personal loan is a better choice than a payday loan, which could have an interest rate as high as 400%.

But if you’re taking out a personal loan because you want to buy a boat or fund a trip to the spa, then you should carefully consider whether it’s worth the interest.

If you take out $10,000 at a 19.90% interest rate over three years, you’ll end up paying $3,361 in interest. (You can test more scenarios with our personal loan calculator.)

Make sure you accept that extra cost. And make sure you won’t have a problem with the monthly payments, as late fees can be brutal.

Carefully assess your situation and needs — not wants! — before deciding if an unsecured personal loan is right for you.