What is an Unsecured Personal Loan?

Most personal loans are unsecured. An unsecured loan is a loan that does not require the borrower to put up any property as collateral. This means that the borrower is not at risk of losing any property if they default.

Read on to learn how unsecured personal loans work.

How do unsecured personal loans work?

Personal loans are typically issued by banks, credit unions or online lenders. The loan amount, interest rate and terms you obtain can vary depending on factors like your credit history, income, and the lender.

Personal loans typically have a fixed interest rate and set repayment period. This means your monthly payment is the same for the life of the loan, so long as you make on-time payments. Unsecured loans don’t require collateral, like a car or house, so you can’t lose your property if you default. Because they’re unsecured, they can carry higher interest rates than secured loans.

To obtain a personal loan, you must fill out an application and provide financial information. The lender will typically ask for information like your date of birth and income, and you may authorize them to perform a credit check. You might also need to supply a few documents, like:

• Proof of identity, such as your passport, driver’s license, military ID or state ID.
• Proof of address, such as a government ID, utility bill or lease agreement.
• Proof of income and employment status, such as your W-2, tax returns or bank statements.

If you’re approved for a personal loan, the funds will be deposited into your account or you’ll receive a check by mail. You'll then be responsible for making monthly payments.

Benefits and drawbacks of unsecured personal loans

Like any financial product, personal loans come with pros and cons. Here are a few things to consider if you’re thinking about getting an unsecured loan. 

Potential benefits

No collateral needed: One advantage of an unsecured personal loan is you will not have to put up any collateral. This means you will not risk losing any property if you default on the loan.

Convenience: Personal loans can be convenient. Payments are typically the same every month for the life of the loan, so they’re easy to budget for. You can also usually find out whether you’re approved and receive funds fairly quickly.

Can be used for a variety of expenses: Unsecured personal loans can be used for a variety of purposes, including consolidating debt or making home improvements.

Potential drawbacks

Interest rates: Because they’re unsecured, personal loans can carry higher interest rates than secured loans.

Consequences for missed payments: Like any loan, if you default on a personal loan or miss payments, your credit score can take a hit.

How do you qualify for an unsecured personal loan?

While the requirements to qualify for a personal loan can differ by lender, they usually consider these factors:

Creditworthiness: Your credit history and credit score can tell lenders whether you’re a responsible borrower and whether you have a history of making on-time payments.

Income: There may be a minimum income requirement, or you may need a higher income to qualify for a loan of a certain size.

Age: Lenders typically have minimum age requirements.

Debt-to-income ratio (DTI): Your DTI is the percentage of your gross monthly income that goes toward your monthly debt payments. This number helps lenders evaluate your ability to afford new loan payments and decide whether you’re in a position to take on more debt.

These factors not only help lenders decide whether to approve you but can help them determine how much to allow you to borrow and the interest rate on your loan. 

Find the right unsecured personal loan

If you’ve found that an unsecured personal is right for your financial needs, Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.