How to get an unsecured personal loan

A record 19.3 million Americans had at least one unsecured personal loan as of 2019, according to the Federal Reserve Bank of St. Louis. Outstanding balances on those loans exceeded $143 billion—up $26 billion from 2017.

Powered by fintech lenders, the unsecured personal loan market has grown rapidly over the past few years. It’s a trend that’s expected to continue.

But why?

It’s because unsecured personal loans offer borrowers a myriad of benefits, such as debt consolidation and the ability to make purchases without the use of a credit card (which could have higher interest rates). Money from such loans can also come in handy if you encounter the unexpected, such as an emergency room visit or a job layoff.

Since unsecured personal loans have only recently surged in popularity, many consumers don’t fully understand them. In this article, we’ll go over all you need to know and explain how you can get an unsecured personal loan.

What is an unsecured personal loan?

Unsecured personal loans are loans made from financial institutions to individual borrowers. They can be used for a variety of purposes. However, they’re generally not meant for expenses like paying college tuition or buying a home or car. Common uses of unsecured loans include:

  • Debt consolidation: Unsecured personal loans often have lower interest rates than credit cards, so many borrowers choose to consolidate credit card debt through personal loans.
  • Expense financing: Sometimes people may not have the money on hand to pay for medical bills, car repairs, home renovations, and other necessary expenses.
  • Emergency funding: If you lose your job or face unexpected expenses, you may need cash to make ends meet.

To obtain an unsecured personal loan, you don’t need collateral. Other common loans, such as auto loans, have collateral (The car itself!). With a mortgage, the collateral is the house.

Additionally, unsecured personal loans are amortized loans. As Investopedia notes, amortized loans have scheduled periodic payments that include both interest and principal. Typically, each payment is the same amount, with the loan paid off after a set number of months or years.

Steps to get an unsecured personal loan

You can make the process of getting an unsecured personal loan quick and easy by preparing in advance. Follow these steps to increase your chances of being approved:

1. Gather personal information and important documents

Having all the necessary info on hand will streamline the application process. To apply for a personal loan, you will most likely need:

  • Identification information, such as a state-issued ID and/or Social Security number
  • Proof of income, which you can show with recent W-2s and pay stubs
  • A bank account, so the lender can send you money
  • A credit score check (the lender does this)

Note: Lenders generally do a soft credit check to see if you pre-qualify for an unsecured personal loan. Soft credit inquiries don’t affect your credit score. That allows you to see potential rates and terms before going through the final application process.

2. Make a list of potential lenders

When looking for potential lenders, make sure of the following: 

  • The lender can offer the loan amount you need. Unsecured personal loans can range from less than $1,000 up to $50,000, according to NerdWallet. At Personify Financial, we offer loan amounts from $500 to $10,000 (ranges vary by state).
  • The lender has suitable loan terms. How much do you want to borrow and for how long? If you want a $30,000 loan, for example, over what period of time can you reasonably pay it back? This will be based on what your monthly cash flow looks like, among many other considerations.
  • You can make the monthly payments. Some lenders follow the 28/36 rule. This states you shouldn’t spend more than 36% of your gross income on debt service. If the monthly payment for your unsecured personal loan along with other debt payments exceed 36%, some lenders may not approve you.
  • You meet the lender’s credit score requirements. Some lenders adhere to strict credit score requirements, and may only lend to those with good credit scores (670+). Here at Personify Financial, we believe there’s more to your financial situation than a number. We look at other factors in addition to your credit score to determine your eligibility.

Tip: Go to AnnualCreditReport.com and get your annual free credit report. Find out where you stand so that you only apply with lenders who are willing to work with you

3. Compare interest rates, loan terms, and loan fees

For apples-to-apples comparisons of unsecured personal loans, check the annual percentage rate (APR). The APR is the annual cost of borrowing and includes all interest and fees, including origination fees. You’ll find that APRs for unsecured personal loans can differ dramatically.

By shopping around and comparing multiple offers, you can save lots of money.

Additionally, keep an eye out for loan fees that could be assessed later and add to the cost of borrowing. For example, a prepayment penalty could cost you hundreds of dollars if you choose to repay a loan early. At Personify Financial, we don’t charge prepayment fees.

4. Narrow your lender choices and get pre-qualifed

Narrow your choices down to a few based on which lenders suit your needs and who offer the best rates and terms. Then, apply with the right lenders for you.

Thanks to modern technology, you can get pre-qualified in minutes. As long as you provide all the necessary information, you should also find out whether you meet eligibility requirements within minutes (though it could take longer). If you’re qualified, you’ll see the loan amount, rates, terms, and monthly payments you may get with that lender.

Before completing the formal application, determine which lender has provided the best offer for you. Consider rates and terms first, but also look at other factors, such as monthly payments and the lender’s reputation.

5. Apply

When you formally apply for an unsecured personal loan, the lender will do a hard credit inquiry. This will impact your credit score slightly.

The lender may take one to two business days to underwrite the loan. Some online lenders may complete underwriting within just a few hours. It all depends on the lender and the information you provided. 

If you’re approved, you’ll agree to the rates, terms, monthly payments, and conditions of the loan. Then all that’s left to do is wait for the money. It should take between one and three business days to show up in your account.

Getting the best possible unsecured personal loan

By preparing and shopping around for the best rates and terms, you can improve the odds of getting the best possible unsecured personal loan. If you have time before you apply, know you can take steps to get an even better unsecured loan.

For example, you can get better rates and terms if you do the following: 

  • Improve your credit score: Payment history is 35% of your credit score. Consistently make payments on time for credit cards, auto loans, student loans, etc. Credit utilization accounts for 30% of your score. Pay off your other loan balances as much as possible.
  • Boost your income: Get a side job. With more income, you might qualify for a higher loan amount, longer term, and/or lower rate.
  • Increase your savings: Having some reserves in the bank may lower the risk some financial institutions consider when lending to you.

To conclude, do your due diligence. The right personal loan may not only save you money—it could also put you in a position to improve your financial well-being.

The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.