How to get an unsecured personal loan

Unsecured loans are loans where lenders don’t require collateral for approval. They are different from secured loans, which require collateral (like a car or a house) that the lender can repossess if you fail to make repayments. Unsecured loans are based on your financial history, including credit history, current debts, and income. 

Interest rates for an unsecured personal loan may range from 6% to 36%, though the Federal Reserve reports that the average personal loan interest rate is 17%.

Who Offers Unsecured Personal Loans?

There are a few places to apply for an unsecured personal loan, though you should consider the pros and cons of each before making a decision. 

Banks

Banks offer unsecured personal loans and might be a good option if you already have a good relationship with your bank. If your accounts are in good standing, you may be able to get a bigger loan or better interest rates. There are some drawbacks as banks typically only accept borrowers that have good credit scores and may not offer pre-qualification.  

Online Lenders

Unlike some banks, many online lenders offer pre-qualification. This allows you to submit some personal information to get a preview of a loan you may qualify for, including the loan amount and terms. With pre-qualification, online lenders run a soft credit check that doesn’t affect your credit score. 

Online lenders are often the fastest way to get a loan as you apply online and often get a decision on the same day. They may also directly deposit the loan amount to your account. 

Credit Unions

If you have less-than-great credit, a credit union may be the option with the best rates since federal credit unions cap APRs at 18%. Like banks, credit unions do not offer the option to pre-qualify, so shopping around for the best loans can be a hassle. 

Credit unions only extend loans to members and membership qualifications differ from credit union to credit union. Some require you to live in a particular area or be a part of a special group that the credit union works with. 

How Do I Qualify for an Unsecured Personal Loan?

Depending on where you apply for a personal loan, several different factors may come into play. Some lenders focus solely on your credit score, offering the best rates and largest loan amounts to those with excellent credit scores. 

Other lenders may also look at your credit history and only extend loans to those with a minimum credit history length (usually two years). Those with longer credit histories may be able to access better terms.

Lenders also consider your debt-to-income (DTI) ratio to see if you already carry a lot of debt. This ratio compares your monthly debt payments to your monthly income. Those that are already carrying a lot of debt may appear riskier to lenders who might think you will have a hard time paying back their loan. The ideal range for DTI is under 40%. 

Once you have a good idea of which type of lender may be best for you, be sure that your financial information is in order. If you have at least two years of credit history and a good credit score, you should be able to qualify for an unsecured personal loan with good rates.