What are unsecured personal loans?

0-9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

An unsecured personal loan is a type of consumer financing that does not require the pledging of additional collateral to the lender as a condition for loan approval.

Personal loans can be either secured or unsecured. In addition, unsecured loans are available in various categories besides personal financing, including unsecured business credit cards and unsecured student loans.

In contrast, a secured loan is a loan requiring an item such as an automobile’s title, piece of equipment, or other appraisable asset to be pledged to the lender as security. Should a secured loan go into default, the borrower may be forced to forfeit ownership of the asset to the lender. An unsecured personal loan requires no such pledge.

Types of unsecured personal loans

American consumers have access to various types of unsecured personal loans and credit lines today. The following are the most commonly known:

  • Payday loans. Sometimes called cash advance loans, payday loans are short-term personal loans that require no collateral but usually require payment in full on or about the next scheduled payday for the borrower.
  • Installment loans. This traditional form of unsecured personal loans is structured with periodic installment payments. The installments may be monthly, biweekly or even weekly. The installment payments are usually amortized and cover both the interest charges due for that period and a portion of the principal balance.
  • Signature loans. A traditional term for unsecured personal loans is signature loan, because the personal loan is secured only by the borrower’s signature on the loan agreement.
  • Credit cards. Standard credit cards require no collateral. But instead of giving borrowers a lump sum loan amount, credit cards give users a line of credit.
  • Peer-to-peer loans. As the name suggests, a peer-to-peer loan is a personal loan arranged between two (or more) individuals. This can be done directly, or it can be facilitated by another person, company or website.

Unsecured personal loan terms

Unsecured personal loans can be used for almost any purpose, including debt consolidation, home improvement, automobile purchases or personal emergencies. Loan terms for unsecured personal loans vary according to the lender’s guidelines and state regulations.

With short-term payday advance loans, the loan term often expires within a month. With longer-term installment loans, the loan may last up to three years and the payments may be amortized to pay off the loan’s principal and all interest charges within the scheduled term.

Similarly, the interest rates charged on unsecured personal loans will vary, based on the borrower’s credit and the lender. Borrowers with excellent credit and strong incomes may be able to get an unsecured personal loan at their local bank or credit union. Other borrowers with less-than-perfect credit may have to rely on finance companies for personal unsecured loans, which may entail higher rates.

Unsecured personal loans can be issued as a lump sum or as a revolving personal line of credit. A lump sum amount is typically repaid in equal installment payments until the loan is retired. The most popular type of unsecured personal line of credit is credit cards, which assigns a credit limit against which the user can borrow money. As funds are withdrawn, the borrower has the choice of making a minimum payment when due or of paying off the outstanding balance in part or in full.

Unsecured personal loans are available to consumers nationwide through an array of loan programs. Before accepting a personal loan, consumers should always perform their due diligence, understand the loan program and consult a financial advisor.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

back to glossary

Check Your Eligibility

This won’t affect your credit score!