What is the difference between a secured and an unsecured loan?

A secured loan requires you to pledge an asset, such as a house or car, as collateral. If you default, the lender can take that asset. An unsecured loan does not require any collateral; the lender relies on your credit history and income to approve the loan. Because unsecured loans are riskier for lenders, they typically have higher interest rates and stricter credit requirements.

Can I get an unsecured loan with a low credit score?

Yes, some lenders offer unsecured loans to borrowers with less-than-perfect credit, but you will likely face higher interest rates and less favorable terms. Your monthly payment may be higher, and the loan amount may be limited. It is important to compare offers and consider whether the loan fits your budget.

How does my credit score affect my unsecured loan terms?

Your credit score is a key factor lenders use to determine your interest rate, APR, and loan eligibility. A higher credit score generally qualifies you for lower rates and better terms, while a lower score leads to higher rates and stricter conditions. Maintaining a good credit history can save you money over the life of the loan.

Unsecured Loan Guide: What Is an Unsecured Loan?

Reviewed by the LoanPolicies Editorial Team · Updated 2026-09-05

Learn what an unsecured loan is, how it differs from secured loans, and what lenders consider. Understand interest rates, credit score requirements, and monthly payments.

An unsecured loan is a type of loan that does not require collateral, such as a house or car, to secure the debt. Instead, a lender evaluates your creditworthiness, income, and financial history to decide whether to approve the loan. This guide explains how unsecured loans work, what factors affect your interest rate and monthly payment, and how to choose the right loan for your needs.

How Unsecured Loans Work

When you apply for an unsecured loan, the lender does not have a claim on any of your assets if you default. Because the loan is not backed by collateral, the lender takes on more risk. To compensate, unsecured loans often carry higher interest rates and stricter credit requirements compared to secured loans. The loan term — the length of time you have to repay — can range from a few months to several years. Your monthly payment is determined by the loan amount, interest rate, and loan term. Some unsecured loans have a fixed interest rate, meaning your monthly payment stays the same; others may have a variable rate that can change over time. The APR (annual percentage rate) includes the interest rate plus any fees, giving you the true cost of borrowing.

Common Types of Unsecured Loans

Unsecured loans come in several forms, each designed for different borrowing needs. The most common types include:

Personal loans — versatile loans used for debt consolidation, home improvements, medical bills, or major purchases. Loan amounts typically range from a few hundred to tens of thousands of dollars.
Student loans — education-specific loans that may have deferred payment options while you are in school. Private student loans are unsecured, while federal student loans are backed by the government.
Debt consolidation loans — used to combine multiple high-interest debts into a single loan with one monthly payment, often at a lower interest rate.
Signature loans — a type of personal loan that relies solely on your signature and credit history, with no collateral required.

What Affects Your Interest Rate and APR

Lenders use several factors to set your interest rate and APR. Your credit score is the most influential: borrowers with high credit scores typically receive lower rates, while those with lower scores face higher rates. Your debt-to-income ratio also matters — a lower ratio suggests you can handle additional debt. The loan amount and loan term can affect the rate as well; shorter terms often come with lower rates. Additionally, the lender may charge origination fees, which are included in the APR. Because unsecured loans carry more risk for the lender, rates are generally higher than those for secured loans like mortgages or auto loans.

Pros and Cons at a Glance

Pros	Cons
No collateral required — your assets are not at risk	Higher interest rates compared to secured loans
Faster approval and funding process	Stricter credit score requirements
Flexible use of funds for any purpose	Lower borrowing limits than secured loans
Fixed monthly payments make budgeting easier	Possible origination fees or prepayment penalties

How to Choose the Right Unsecured Loan

Before you apply, take these general steps to find a loan that fits your situation:

Check your credit score and review your credit report for errors. A higher score can unlock better interest rates.
Shop around with multiple lenders to compare interest rates, APRs, loan terms, and monthly payments. Use a loan comparison site to see offers side by side.
Read the fine print for any fees, such as origination fees, late payment penalties, or prepayment charges.
Only borrow what you need and can comfortably repay. A longer loan term reduces your monthly payment but increases total interest cost over time.
Consider whether a fixed or variable rate is better for your financial stability.

This guide provides general educational content, not financial advice. Your individual circumstances may differ. Always review loan terms carefully before signing any agreement.

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