Unsecured personal loan: When it’s a smart way to borrow

By Margie Zable Fisher

Reviewed by Kimberly Rotter

Jan 30, 2023 - Updated Jul 13, 2023

Read time: 6 min

Unsecured Loan

Key Takeaways:

  • An unsecured personal loan is based on your creditworthiness and does not require collateral

  • Credit card debt is also unsecured, but tends to cost more

  • It’s possible to receive personal loan funds within three days after you apply

Did you just look at your bank account and say, “Where am I going to find the money to pay for that?” The new refrigerator, the medical procedure that is going to cost an arm and a leg, the soccer camp, the auto repairs… Okay, the list goes on, and everyone has their own issues and pursues their own dreams.

Before you pull out your credit card or go down to the local pawn shop, take a look at how an unsecured personal loan can help you meet your financial goals.

Not sure how? We’ll break it down.

What is an unsecured personal loan?

An unsecured loan is a loan you get based on your creditworthiness. Unlike secured loans, which provide money to borrowers with assets (mortgages and cars, for example), unsecured loans do not require any assets or collateral. 

Unsecured personal loans are considered installment loans. That means you borrow a set amount at a fixed interest rate that won’t change for the life of the loan. That’s really important in times when interest rates go up. You’ll pay off the loan in equal monthly payments over a time period that is determined when you get the loan.  

Unsecured loans can be harder to get than secured loans. That’s because with a secured loan, if you default, the lender gets your collateral. With an unsecured loan, they would be stuck with the loss. So, the rates are typically higher for unsecured loans compared with secured loans. You will still need to go through the qualification process to get this type of loan. But if you have a history of repaying your debts and your credit score is fair or better, you might qualify for an unsecured loan.

How do unsecured personal loans compare to credit cards?

Did you know that your credit card charges are actually loans? It’s true. They are another kind of unsecured loan since there is no collateral that the credit card company can take if you don’t pay your balance.

However, there are several important differences between an unsecured personal loan and credit card charges.

Loan amount versus credit limit

Instead of a fixed loan amount, you get a credit limit for your credit card loan. The credit limit is the most you can owe. Credit cards are also known as revolving credit because as you pay off your charges, you can make more purchases. In this way, borrowing and spending can go on indefinitely. An unsecured personal loan doesn’t work that way. You’ll borrow money one time, and there’s a clear plan for payoff.

With a credit card, after each billing cycle, you can choose to pay off all of your charges or carry the balance over to the next month. If you have a balance on your credit card, you will need to pay a minimum amount each month. That could be much less than the required monthly payment amount for an unsecured personal loan.

If your payment is less than what you owe on your credit card, you’ll pay interest on the unpaid balance. Credit card interest rates are variable, which means they fluctuate depending on the economy. It’s normal to have a credit card interest rate that’s 20% to 36%.

Unsecured personal loans also charge interest, but the rate won’t change, and it’s usually much lower than the rate on your credit card. The average interest rate for unsecured personal loans is around 10%, with rates ranging from 8% to 29%.

The loan amount for unsecured personal loans can be up to $50,000, with a typical repayment period of two to five years. The average credit limit for credit cards ranges from $1,800 to $11,000, with a repayment period that could go on… well, forever.

Here’s a quick way to see the differences between unsecured loans and credit cards:

Unsecured Personal Loan

Credit Card

Set interest rate

Variable Interest rate

Specific loan amount

Revolving credit limit

Up to a 5-year loan period

Ongoing loan

Up to $50,000

Based on credit limit

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What are common uses of an unsecured personal loan?

You can use an unsecured personal loan for many types of expenses and purchases. Here are some common uses for an unsecured loan.

  • Pay down higher-interest rate debt. You know how we mentioned that credit card interest rates are generally pretty high? An unsecured personal loan is one way to pay off your credit card balance at a lower cost.

  • Make home improvements and repairs. Homeowners and some renters have all kinds of expenses. Sometimes, they’re planned, like when you want to update your kitchen or bathroom. Other times, they’re unexpected— like when your air conditioner breaks down in the middle of summer, and you need to replace it ASAP. Either way, it can be hard to have enough savings to pay for everything you want to do in your home. Some expenses, like a new roof, are really high, possibly even higher than your credit card limit, and may require an unsecured loan.

  • Pay for “Life Happens” events. Unexpected expenses like medical bills or funerals happen. So do good things, like weddings or moving to a new home. An unsecured loan can help you with all of life’s financial ups and downs.

  • Fund a small business. If you’re a small business owner, you know that cash flow is critical. While you can use credit cards to finance your business, an unsecured personal loan can be a smart way to get access to much-needed cash.   

What are the rates for an unsecured personal loan?

The interest rate for your unsecured personal loan will depend on your credit rating. You can expect to pay anywhere from 8% to 30%. When you research loans, ask about personal loan interest rate discounts that can lower your cost, including:

  • Co-borrower discount: Your besties (friends and family) can help you out by co-signing your loan. This can help reduce the risk to the lender, and that in turn can lower your rate.

  • Retirement asset discount: Saving for retirement? Good for you—and it’s good for your possibility of a discount, too. If you can provide proof of retirement funds in a 401(k), IRA, Roth IRA, or other retirement fund, lenders know that you have backup funds that can reduce your risk of default.

  • Direct pay discount: If your loan money is going towards debt payoff, consider letting your lender send the funds directly to the creditor. Some lenders offer a discount when you do.  

You can apply for all three of these discounts for an Achieve personal loan, for potentially significant savings. 

How do I apply for an unsecured personal loan?

Got five minutes? That’s all it takes to fill out an online application. You’ll get an answer in 24-72 hours.

Want some help? Call us at 1-800-920-0045, and one of our Achieve specialists will walk you through the process.

Margie Zable Fisher

Margie is a freelance personal finance and retirement writer for AARP, The New York Times, Fortune.com, Next Avenue, and more.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

A secured loan requires assets or collateral to be provided to the lender in case of loan default. An unsecured loan does not require collateral.

With an unsecured loan, the lender doesn’t have the right to take your assets or collateral if you default on the loan. Secured loans offer that protection. For the extra risk, lenders charge a higher rate.

A personal loan has several advantages over credit card debt. It offers a fixed interest rate and payment amount, which makes budgeting and planning easier. You can also typically repay the loan faster, as the amount isn’t subject to fluctuating interest rates. Plus, it’s often cheaper than carrying a credit card. Finally, it can help improve your credit score over time if you make timely payments.

When you apply, tell the lender you have a co-applicant. This is usually a box to check when you apply online. The lender will verify both people’s identity and income, and will check both people’s credit.

It's important to note that you cannot directly pay your credit card bill with a personal loan.

However, you can use a personal loan to pay off your credit card debt. Doing so can simplify your debt by consolidating multiple credit card balances into a single loan with a fixed interest rate and payment amount. This can potentially help you pay off your debt faster and save money on interest charges.

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