What is an Unsecured Personal Loan?

Key Insights:

• Unsecured personal loans don’t require collateral, helping reduce the risk of losing assets if you default on payments
• These loans have fixed monthly payments and interest rates, making them predicable and potentially easier to budget
• Funds can be used for various purposes, such as home improvements or large purchases
• Unsecured loans may carry higher interest rates compared to secured loan options

Most personal loans are unsecured. An unsecured loan is one that does not require the borrower to provide any collateral. This means that the borrower is not at risk of losing any asset if they default.

Read on to learn how unsecured personal loans work and if one is right for you.

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 a 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 personal 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 personal loans.

To obtain a personal loan, you must fill out an application and provide financial information. The lender will typically ask for information such as your date of birth and income, and you may authorize them to run 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..

Different types of unsecured loans

While there are several types of unsecured loans, the following 3 are the most common types you may recognize:

Personal loans

Personal loans are one-time, lump-sum loans that qualified borrowers can use for almost anything. This type of loan usually has a fixed interest rate and is repayable in fixed monthly installments over a set period.

Credit cards

Credit cards allow you to borrow money against your credit line for purchases, cash advances and even debt consolidation via balance transfers. Most credit cards do not require collateral to borrow funds, unless they are secured credit cards.

Student loans

Student loans are offered through government or private lenders for education-related costs, such as college tuition. Borrowers repay student loans in monthly installments, typically starting after graduation.

Benefits and drawbacks of unsecured personal loans

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

Potential benefits

• No collateral needed: One advantage of an unsecured personal loan is that you don’t have to put up any collateral. This means you won’t risk losing any asset if you default on the loan.
• Convenience: Personal loan payments are typically the same every month for the life of the loan, so they can be easier to budget. 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, you may be charged fees and your credit can take a hit.

How do you qualify for an unsecured personal loan?

While each lender has its own eligibility requirements for personal loans, 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 requirement
• 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 able to take on more debt.

These factors not only help lenders decide whether to approve you but can also help them determine your loan amount and interest rate.

Find the right unsecured personal loan for you

If you believe an unsecured personal loan 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.

Unsecured personal loan FAQs

Is it better to get a secured or unsecured personal loan?

It depends on your financial situation. Secured loans often have lower interest rates but require collateral , while unsecured loans don’t require collateral but may have higher interest rates.

Is an unsecured loan good or bad?

An unsecured loan can be good for flexibility and avoiding collateral risks, but higher interest rates and stricter credit requirements than secured loans may be drawbacks.

Does an unsecured loan affect your credit?

Yes, it can positively impact your credit score if you make on-time payments, while missed payments or defaults can do the opposite.

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.