What is an unsecured personal loan?

Secured vs unsecured: A secured loan is backed by an asset (your car, your home, a savings deposit). If you default, the lender can take that asset. An unsecured loan has no such backstop - the lender's only recourse if you default is a collections process and possible legal judgment.

Why unsecured loans have higher rates: Without collateral, the lender takes on more risk. That risk is priced into the interest rate. A secured auto loan at 6% covers default risk with a repossessible vehicle; an unsecured personal loan at 10% prices in the same expected default risk through a higher rate.

Benefits of unsecured personal loans: (1) No collateral at risk - if you cannot pay, you owe money but cannot lose your house or car through the loan itself. (2) Faster - no appraisal or lien process. (3) Flexible use - proceeds can go anywhere. (4) Fixed rate and term - unlike a credit card, you know exactly when it is paid off.

Who issues them: Online lenders, credit unions, banks, and some fintech lenders. Amounts typically run $1,000-$100,000, terms 1-7 years.

Credit requirements: Since there is no collateral cushion, lenders lean harder on your credit score and DTI. Most mainstream lenders want 620+; the best rates require 720+.

Exception - secured personal loans: Some lenders offer personal loans secured by a CD or savings account (called a credit-builder or share-secured loan) at much lower rates. These are a niche product but worth knowing about.