What is an unsecured personal loan?

December 17, 2019

By Michelle Huffman

What is an unsecured personal loan?

Sometimes you need a little extra cash. Maybe you want to renovate your home, consolidate debt, handle an emergency, or purchase a car.

While it’s always best to pay for those kinds of things in cash, a personal loan may give you that little extra you need.

A personal loan works very similarly to any other loan. You receive the money in a lump sum and you pay it back, along with interest, in monthly installments over a set period of time. The money you receive can be used for almost anything.

Secured vs. unsecured loans

There are two versions of a personal loan: Secured and unsecured. The main difference is in collateral. A secured loan is, well, secured by collateral. With a secured loan, you agree that if you stop paying the loan and default, the lender can take the collateral (think about an auto or home loan). Personal loans are typically secured with a CD or a savings account. Because you are offering collateral, a secured loan will typically be easier to qualify for and will carry a lower interest rate than an unsecured loan.

But what is an unsecured personal loan? An unsecured loan requires no collateral. If you default on an unsecured loan, it may go to collections and damage your credit. The term is usually between one and five years. Qualifying for these loans will require personal and employment information, running your credit to determine your creditworthiness, and may require a W2 or paystub.

These loans typically don’t carry any prepayment penalties, so you can pay the loan off in full early and save money on interest.

Unsecured loans vs. credit cards

At this point, you’re probably wondering how an unsecured loan differs from a credit card. They do function very similarly, with one key difference.

A credit card is what’s considered revolving debt, meaning that if you charge $100 on a card with $1,000 limit, and you pay back that $100, you will once again have $1,000 to spend. With a loan, known as fixed debt, you receive a $1,000 lump sum, and that’s it.

A personal loan also offers you the ability to have cash, which is better for those times where credit cards are not useful or accepted forms of payment, perhaps when hiring a contractor for home repairs.

An unsecured personal loan may also offer a lower interest rate than a credit card. However, you should watch out for origination fees, which can impact the total cost of the loan.

When should you consider an unsecured personal loan

If you are someone who has trouble managing your credit cards, but you need a quick cash injection, a personal loan may be the right option, since your debt load cannot grow. If you need more time to pay off a purchase and a personal loan offers a lower interest rate than your credit card, it makes fiscal sense to opt for the loan.

Applying for an unsecured loan can be a simple process, similar to a credit card. For example, you can apply for an Alliant unsecured personal loan online, and you could receive same-day approval and even same-day deposit into your account. However, it’s important to make sure you can afford to repay the loan on time every month.

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