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A signature loan is a personal loan that doesn't require you to secure it with collateral, like a house or car. If you're looking for a flexible financing solution, a signature loan may be a good option as long as you have the good credit and income to qualify. Here's what you need to know about how signature loans work, how you can get one and the pros and cons of this loan option.
What Is a Signature Loan?
A signature loan is a type of personal loan that doesn't require any collateral—your signature on the loan agreement is your promise to pay. They are sometimes referred to as "good faith" loans because they rely on your signature and creditworthiness rather than assets. Signature loans are versatile and can be used for a variety of purposes, including debt consolidation and emergency expenses.
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How Does a Signature Loan Work?
When you take out a signature loan, the lender provides you with a lump sum of cash, which you agree to repay in fixed monthly installments over a specified time period. The amount, interest rate and repayment term depend on factors such as your credit score and income.
To qualify, you'll need strong credit and enough income to make monthly loan payments. The application process is pretty straightforward:
- Submit an application with your personal and financial information.
- The lender reviews your credit to determine your eligibility and set your interest rate.
- If approved, the lender deposits funds into your bank account.
Since there's no collateral to offset the default risk, interest rates on signature loans are generally higher than interest rates on secured loans. However, rates are generally lower compared to credit cards.
Repayment periods typically range from three to 96 months, depending on your loan amount and lender. Smaller loans may have a shorter repayment period. Your monthly payments will include both the principal and interest.
Best Uses of a Signature Loan
Because signature loans are flexible, you can use them for a variety of purposes. Some of the best include:
- Consolidate debts: Use a signature loan to consolidate multiple high-interest debts, like credit cards, into a single payment with a lower interest rate. This can help lower your overall interest rate, making it easier to pay down your debt faster.
- Home improvement: Finance renovations or repairs without needing to put your home up as collateral, unlike home equity loans. Using a signature loan won't reduce your home equity, which is beneficial if you plan to sell your home in the future.
- Medical bills: Pay for medical expenses that aren't covered by insurance, like emergency care, surgery costs or ongoing treatment expenses. Since the approval process is quick, you don't have to delay treatment for urgent medical care.
- Emergency expenses: A signature loan can help you cover expenses beyond your emergency fund. With quick access to cash, you can handle unexpected costs like major car repairs, sudden travel costs or support during an income gap.
- Buying a car from a private seller: If you don't want to get an auto loan, or you're having trouble finding a lender to fund your purchase, you can use a signature loan to buy a car. Just be sure to weigh the pros and cons, including the typically higher interest rate that will come with a signature loan.
Learn more >> What Can a Personal Loan Be Used For?
Where Can You Get a Signature Loan?
Signature loans are available from several types of lenders, each with its own advantages.
Banks
Banks are generally the best option for borrowers with strong credit who prefer to borrow from a major financial institution. An existing bank relationship may help you qualify or receive funds faster if you're approved. However, expect banks to have stricter credit and income requirements.
Credit Unions
Credit unions may offer signature loans at lower interest rates compared to banks. You'll need to be a member to apply, but there are plenty of credit unions with flexible eligibility requirements.
Online Lenders
If you prefer quick, convenient access to lending, online lenders may be a good option. You may receive approval and funding faster than with traditional banks or credit unions. Customer service may be limited by comparison, however, and you won't have the option of visiting a branch in person.
How Much Can You Borrow on a Signature Loan?
The amount you can borrow for a signature loan depends on several factors, including your credit score, income and existing debt. Loan amounts often range from $100 to $100,000.
Pros and Cons of Signature Loans
Signature loans have their advantages and disadvantages. It's important to consider both as you weigh your financing options.
Pros
- No collateral required: Since signature loans are unsecured, you don't risk losing valuable assets—like your house or car—if you can't repay the loan.
- Lower interest rates than credit cards: Signature loans often offer lower annual percentage rates (APRs) than credit cards, especially for borrowers with good or excellent credit.
- Quick access to funds: Approval is faster compared to secured loans since there's no inspection or appraisal. Funds are often available within a few business days after loan closing, and sometimes within a few hours.
- Flexible use: You can use the loan for a variety of purposes, such as consolidating debt or funding major purchases.
Cons
- Higher interest rates than secured loans: Since there's no collateral, interest rates are usually higher compared to secured loans.
- Good credit required: You'll typically need strong credit to qualify for a signature loan with good terms. Borrowers with lower credit scores may face higher rates or have a hard time getting approved.
How to Get a Signature Loan
Here's a simple step-by-step guide to applying for a signature loan.
1. Check Your Credit
Before you apply for a signature loan, check your credit score. A high credit score can increase your chances of getting approved and qualifying for a lower interest rate. If your credit isn't great and you don't need the funds right away, consider taking a few months to improve your credit before applying for a signature loan.
Learn more >> How to Improve Your Credit Score
2. Research Lenders
Compare offers from different lenders. If possible, go through the prequalification process to get an estimate of your loan terms without affecting your credit score.
3. Gather Documents
You'll need a variety of documents to apply for a signature loan, including proof of identity (driver's license or passport), proof of income and employment details. The exact documents you'll need will depend on your lender's requirements.
4. Submit your Application
Complete the loan application, providing your name, address and other requested information. Some lenders allow you to apply with a cosigner, though their credit qualifications will affect your approval and terms.
5. Review Loan Terms
Once you're approved, review the loan amount, interest rate, repayment schedule and any fees to make sure the terms will fit your financial situation. While each individual loan application does involve a hard inquiry—which may impact your credit temporarily by a few points—it may be worth it to seek out another lender if the offer you receive won't fit your budget.
6. Accept the Loan and Begin Repayment
Once you agree to the terms, sign the agreement, and the lender will disburse funds to your bank account. You'll begin repaying the loan with fixed monthly payments. If the option is available, you can set up automatic payments to avoid late fees and maintain your credit.
The Bottom Line
A signature loan can be a great solution if you need quick access to funds without putting up collateral. You can use the loan for a variety of purchases, but you'll need strong credit to qualify for the best rates. It's important to carefully review loan terms to be sure you can manage the monthly payments.