Do unsecured loans have higher interest rates?

If you’re considering borrowing money, one of the first questions may be: do unsecured loans have higher interest rates? The short answer is yes — in general, unsecured loans carry higher interest rates than secured loans. But like most things in finance, the full answer requires nuance, context, and an understanding of the factors at play.

In this post we’ll walk you through what unsecured loans are, why they tend to cost more, how much more you might expect, the trade-offs compared to secured loans, what to consider before you borrow, and how you might secure the best rate possible. We’ll also include a quick list of steps you can take to compare loan offers.

What is an unsecured loan?

Definition and key characteristics

An unsecured loan is a loan that is not backed by collateral — no asset (like a house or car) is pledged to secure the debt. Instead, the lender relies on your creditworthiness and ability to repay. 
Common examples include personal loans (where you borrow a lump sum and repay over time), credit cards (though technically a revolving line rather than a fixed loan), and student loans (in many cases).

Why lenders view unsecured loans differently

Because there is no collateral backing the loan, the lender bears higher risk: if you default, there is no specific asset they can seize to offset their loss. Consequently, they must compensate for that risk, often with tougher qualification criteria and higher interest rates. 
Lenders will look more closely at your credit score, debt-to-income ratio, employment history, and overall financial profile when approving an unsecured loan. 

Why do unsecured loans have higher interest rates?

Here are the main reasons why unsecured loans generally have higher interest rates than secured loans:

1. Greater risk for the lender

As noted above, when a loan is unsecured the lender has no asset to fall back on if the borrower stops paying. That means the potential loss is higher, and lenders often price that risk into the interest rate. 
A simple statement from UCU: “Unsecured personal loans typically have a higher interest rate, since the risk is perceived to be higher.” ucu.org

2. Credit-worthiness matters more

Because collateral is absent, a lender depends heavily on your credit history and income stability. Lower credit scores or weaker financial profiles typically mean higher interest rates.
On the flip side, if you have excellent credit, you’ll still pay more than a secured borrower (in most cases), but you’ll be in a stronger position.

3. Lower borrowing limits and shorter terms

Often unsecured loans come with smaller borrowing amounts and shorter repayment terms, which can mean higher monthly payments and increased cost of borrowing over those shorter spans. 
In contrast, secured loans can offer larger amounts and longer terms (which may reduce monthly payments and overall cost).

4. Market and macro-economic factors

Interest rates are influenced by broader market conditions — cost of funds for lenders, default rates, regulatory environment, etc. So the “premium” you pay for an unsecured loan depends not just on your personal profile, but on the lending market overall.

How much higher are the interest rates on unsecured loans?

Here are some benchmarks to give you a sense of magnitude:

• According to Investopedia, the average personal loan interest rate (which is often unsecured) in one dataset was 26.51% for a recent period

• Data from the U.S. Federal Reserve and others suggest unsecured loans have higher rates than secured ones because of the risk differential. 

• A lender example from TD Bank shows unsecured personal loans ranging from 8.99 % to 23.99% APR depending on credit, term, etc. TD Canada Trust

So while there is wide variation, one clear takeaway is: expect to pay more for an unsecured loan than a comparable secured loan, everything else equal.

Secured loans vs unsecured loans: A side-by-side comparison

When might an unsecured loan make sense?

Even though unsecured loans cost more, they can still be the right choice, depending on your situation. Here are some scenarios:

• You don’t have an asset (or don’t want to pledge one) but need funds for a lump-sum expense (like debt consolidation, home improvements, a wedding, etc.).

• You have very strong credit, making you eligible for relatively favorable unsecured rates and terms.

• You prefer the flexibility of not risking collateral. Unsecured loans let you borrow without tying up an asset.

• The amount you need is moderate and the cost of the higher interest rate is still manageable in your budget.

When a secured loan might be better

Consider a secured loan if:

• You have an asset you’re willing to pledge (e.g., a car, savings account, a certificate of deposit) and you are comfortable with the risk.

• You need a larger loan or a longer repayment term and would benefit from a lower interest rate.

• Your credit profile is weaker and you might qualify for better terms by offering collateral.

• You’re confident you can make the payments and prefer the cost savings of a lower rate.

Key factors that determine your interest rate on unsecured loans

When you apply for an unsecured loan, the lender will look at various factors. These help determine the interest rate you’re offered. Key variables include:

• Your credit score and credit history — the higher your score, generally the lower your rate.

• Your income, employment stability, and debt-to-income ratio — proving you can repay reduces lender risk.

• The loan amount, term (how many months/years you’ll repay), and whether it’s a fixed or variable rate.

• Whether the loan is with a bank, credit union, or online lender — different institutions have different pricing models and risk tolerances.

• The overall economic environment (interest rate base, lender funding costs, default rates, etc.).

• The specific use of the loan — lenders may look more favorably on loans that are used for debt consolidation or other “productive” uses.

How you can qualify for a better rate on an unsecured loan

To reduce the cost of an unsecured loan (i.e., obtain a lower interest rate), here are actionable strategies:

1. Improve your credit score before applying (make sure you make payments on time, keep credit utilization low, and correct any errors).

2. Lower your debt-to-income ratio by paying down other debts or increasing stable income.

3. Shop around: compare offers from banks, credit unions, and online lenders.

4. Choose a shorter repayment term (though be careful: this raises monthly payment, so it must fit your budget).

5. Consider adding a co-signer if your credit is weaker; this may lower the risk to the lender and result in a better rate.

6. If you have an asset you’re willing to use as collateral, consider the secured loan option too — it may reduce your cost.

7. Read all terms: Look for origination fees, pre-payment penalties, hidden costs which may offset any lower interest rate.

Common misconceptions about unsecured loans

• Misconception: “Unsecured means cheaper.” No — unsecured means no collateral, but because of that the loan usually costs more.

• Misconception: “If I have great credit, I’ll get the same rate as secured.” Not always — even with excellent credit, unsecured loans tend to have higher rates than secured ones, because lenders still face higher risk.

• Misconception: “Unsecured loans are only bad.” They’re not inherently bad — they’re simply more expensive, so you must evaluate if the value (flexibility, speed) justifies the cost.

• Misconception: “Secured loans are always better.” Not always — the asset risk and borrowing terms may outweigh the rate savings depending on your situation.

Will interest rates on unsecured loans always stay higher?

In a word: likely yes, because the risk differential remains. Whenever there is no collateral, the lender’s risk is greater. That doesn’t mean the difference is fixed — the spread between unsecured and secured rates can shrink or widen depending on market conditions, default rates, lender competition, regulation, and overall economic environment.

For example, as the broad interest rate environment rises (or falls), both secured and unsecured loan rates may move up or down. But the unsecured loan will typically still carry a premium. 

How to compare unsecured loan offers

Here’s a short actionable checklist you can use to compare unsecured loan offers and determine which one is best for you:

1. Check the annual percentage rate (APR) including all fees.

2. Confirm the loan repayment term (length of months/years).

3. Evaluate any origination or pre-payment fees.

4. Compare total cost: monthly payment × term vs. total borrowed.

5. Verify whether the rate is fixed or variable.

6. Review penalties for late payments or missed payments.

7. Confirm what happens in default (late fees, credit impact, collections).

What you should ask before taking out an unsecured loan

Here are some questions to ask any lender before accepting an unsecured loan:

• What is the APR (annual percentage rate) including fees?

• Is the interest rate fixed for the full term, or will it change?

• Are there origination fees, late-payment fees, or pre-payment penalties?

• What will my monthly payment be, and how many payments are required?

• What happens if I miss a payment? What are the consequences?

• Will I receive the loan funds immediately or is there a waiting period?

• How will this loan impact my credit score now and in future?

• Are there other loan types (secured) that might offer better terms for me given my situation?

Practical example: evaluating an unsecured loan for debt consolidation

Let’s say you have $15,000 in high-interest credit card debt at 22% interest and you’re considering a personal unsecured loan to consolidate. You shop around and find a lender offering a 10-year term unsecured loan at 14% APR.

• Monthly payment: approximately 15000×14%12≈$175\frac{15000 \times 14\%}{12} \approx \$1751215000×14%​≈$175 (simplified estimate).

• Over 10 years you’ll pay roughly $21,000 in total (principal + interest).
  Compare this to continuing with the credit cards at 22%: monthly payments may be higher, total interest much more.
  If a secured alternative (for example via home equity) offered you 8% APR, your monthly payment might drop significantly and total interest might be much less — but you’d risk your home if you defaulted.
  This example shows the trade-off: unsecured loan = higher cost but lower asset risk; secured loan = lower cost but higher asset risk.

Risks and downsides of unsecured loans you must consider

• Because interest rates are higher, you’ll pay more over time — and if you’re not careful, you may end up in deeper debt.

• Missing payments still hurts your credit and may lead to collections or legal action. Even though you haven’t pledged an asset, you are still legally obligated. ucu.org

• Some lenders may add higher fees or risk-based pricing for unsecured loans, making cost comparisons harder.

• Because unsecured loans typically offer smaller amounts or shorter terms, you might still carry residual debt after the loan ends.

• Borrowing more because you “don’t have to pledge collateral” may lead to over-extension and financial stress. Always budget carefully.

Summary of key take-aways

• Unsecured loans generally have higher interest rates than secured loans because they carry greater risk for the lender.

• The difference in rate depends on many factors: your credit, income, loan amount/term, and market conditions.

• Unsecured loans make sense when you don’t want to or cannot pledge collateral, you have strong enough credit, and you can manage the cost.

• Secured loans may offer better rates, but come with greater risk to your assets.

• Always compare offers, check APRs, read terms, and ensure the loan fits your budget and goals.

Final thoughts & next steps

If you are thinking about taking out an unsecured loan, pause and reflect:
Why are you borrowing? How much do you need? How long will it take to repay?
Then shop around with multiple lenders, compare rates and terms, and ensure you understand all costs.
If your credit is good and you don’t want to risk collateral, an unsecured loan may be quite reasonable — just accept that the interest rate will likely be higher than secured alternatives.