money in a clip for finding out what personal loans are, how they work

Unsecured Personal Loans: What They Are and How They Work

The Short Version

  • Unsecured personal loans let you take money out without having to offer assets to the bank or lender
  • Depending on your credit profile, rates can get high, so do your research first
  • From vacations to funding your next concert, personal loans are pretty flexible


Taking This Real Personal: Unsecured Personal Loans

Today we’re talking about another kind of loan – and this time, it’s personal.

Personal loans exist to bridge the gap between your imagination and reality, with a reasonably affordable way to take out credit.

Let’s get into what an unsecured personal loan is and how it works.

What Is an Unsecured Personal Loan: The Definition

An unsecured personal loan is a form of credit that lets you borrow money without having to promise the lender any of your assets, like a car or your home.

Secured vs. unsecured personal loan: What’s the difference?

A secured personal loan requires an asset for a lender to agree to or secure the loan. An unsecured personal loan doesn’t require that “security.”

Finance me, now pay me

When a personal loan is unsecured, the bank is taking a bet that you will make good on your signed promise to pay them back. Think of it as like a big IOU.

After applying for and getting a personal loan, you will need to be aware of the following:

  • How much you took out
  • The time you have to pay it back
  • When you have to begin your monthly payments (typically a date is set by the bank that you can change if needed)

You’ll also need to know your interest rate and any potential prepayment penalties or fees when you review the promissory note for the personal loan.

Keep any documents handy. You may need them when applying for other types of credit, like applying for a mortgage on your dream home.

What To Watch Out for With Unsecured Personal Loans: Doing the Most

Unsecured personal loans have a couple of features that make them different from other forms of credit. We’ll give you the lowdown on all of them.

The good, the bad and maybe a little of the ugly

Some of these features may or may not work for you, depending on what you are looking for.

  • A good refinancing option: If you want to pay off high-interest debt, like a credit card, it’s worth considering taking out a personal loan. The rates are often super competitive, compared to credit cards
  • Alternative to payday loans: Payday loans charge significantly more interest and should be avoided if you can. Taking a personal loan out is a good alternative
  • Use them for what you want (mostly!): Whether you’re planning an exotic vacation or want to update your wardrobe, you can use a personal loan to pay for it
  • No collateral needed: Unlike a HELOC (Home Equity Line of Credit) or a secured personal loan, you don’t need to provide an asset to the bank to get a personal loan
  • Short payment terms: Compared to other forms of credit, like a mortgage or a personal line of credit, personal loan payment terms range from 12 to 60 months (occasionally longer), which is great if you don’t want to spend years paying it off[1]

On the other hand, it pays to be aware of the following:

  • High interest rates if you have poor credit: You typically pay higher interest rates due to the lack of collateral on a personal loan. Your rate can also go up if you have less than excellent credit
  • Lower loan amounts: While higher personal loan amounts are possible, because the loans are unsecured, they are usually reserved for those with excellent credit histories and some form of collateral

Where Can I Get an Unsecured Personal Loan

You may be wondering where you can get an unsecured personal loan. Well, that’s what we’re here to tell you.

The three main places are banks, online lenders and credit unions.


The advantage of taking out a loan with a bank is that, if it’s your bank, you’re already banking with them for other services, so you’re a safer bet.

The bank may be able to provide you with access to special interest rates or discounts that you might not find anywhere else.

Online Lenders

Online lenders have the advantage of meeting you where you are at — online.

Usually, all the paperwork is online, too. And that saves time and trees.

Credit Unions

Credit unions have a good reputation for handing out personal loans at reasonable rates if you are a member. It’s worth checking them out as an option.

Personally, I feel good about this

You know what a personal loan is, and you know how it works. Now you are more than ready to do some (well-informed) research. It kind of hits different when you have the info you need to make the best decisions, right?

  1. Experian™. “What Is the Best Term Length for a Personal Loan?” Retrieved December 2021 from

  2. Chamber of Commerce. “Personal Loan Statistics.” Retrieved December 2021 from

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