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.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal Loans: Fixed rates from 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 2018 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 credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. 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.

    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.
  2. 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.
  3. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  4. 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 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.

3 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 4.99% 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 4.99% APR loan, a borrower will need excellent credit on a loan of $15,000 with a term of 24 months, and qualify for at least two of the following discounts: (1) add a co-borrower who has sufficient income; (2) use at least fifty percent of the loan proceeds to directly pay off existing debt; or (3) show proof of having at least forty-thousand dollars in retirement savings – contact FreedomPlus for further details.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 15.49% APR to a high of 34.49% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** 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.

7.73% – 29.99%$1,000 - $50,000

Visit Upstart

6.26% – 14.87%1$5,000 - $100,000

Visit SoFi

6.99% – 35.97%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

4.99% – 29.99%3$10,000 - $35,000

Visit FreedomPlus

5.99% – 18.99%4$5,000 - $50,000

Visit Citizens

15.49% – 34.49%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. 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 understand what you are buying, and consult 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. Please do your homework and let us know if you have any questions or concerns.

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.