An unsecured loan, also known as a signature or personal loan, is one that does not require collateral. Unlike with a mortgage or an auto loan where a lender has repossession rights during the repayment period, the strength of your promise to pay is all that guarantees an unsecured loan. Although specific requirements vary depending on the lender, a combination of factors, including income, debt ratio and credit history, all speak to your ability and willingness to pay.
An unsecured loan application will ask the primary applicant -- and a co-applicant or cosigner, if there is one -- for personal, employment, gross income and monthly debt information. You also may need to verify your identity, address and past income. Commonly required documents include:
- Identification verification: driver’s license or state identification card, Social Security card or a passport
- Address verification: recent mail showing your current address or a copy of your lease agreement
- Past income verification: pay stubs, checking account statements, W-2 forms or tax returns
You do not have to include child support, alimony or income from federal or state benefits if you do not wish to have it considered as a basis for repaying the loan.
Debt ratio points to your ability to pay. Lenders use it as a risk management tool to determine loan eligibility and to set an appropriate interest rate.
The standard requirement is a debt-to-income ratio of less than 36 percent. This means that current debt obligations should not consume more than 36 percent of your gross monthly income. As an example, for a monthly gross income of $2,500, monthly debt payments, including credit card, auto loan, student loan and other consumer debt obligations should not exceed $900.
In general, the closer your debt ratio is to the 36 percent threshold, the higher the interest rate will be.
Credit scores combine with your debt ratio to paint an overall picture of your creditworthiness. Many lenders use FICO -- Fair-Isaac Corporation -- credit scores from one or more of the three credit-reporting agencies. Although your credit score must fall within an acceptable range, minimum score requirements vary according to the risk a lender is willing to assume. For example, one lender might require a credit score of 680 while another lender may require a credit score of at least 700 to qualify.
As part of an overall picture, credit scores also play a role in setting interest rates. According to Lending Tree, median interest rates in March 2015 for personal loans ranged between 8.18 and 30.02 percent.