A signature loan is another name for an unsecured personal loan, which allows you to borrow money without having to put up collateral. Signature loans are sometimes referred to as “good faith” or “character” loans because your signature serves as a promise to repay the loan.
“Signature loans don’t require you to pledge any collateral but your signature when you apply,” Ohan Kayikchyan, a certified financial planner with a doctorate in economics, said. “Your signature is a legal promise to pay the loan back according to its terms. In order to get approved for such an unsecured loan, the lenders take into consideration your overall financial wellness, including your credit score, your income level, and what other obligations you currently have.”
A signature loan is a term loan that you repay in monthly installment payments, with interest, over a set repayment term. These are usually short-term loans that have repayment periods ranging from just a couple of months to five years. Because there are no collateral requirements with signature loans, lenders take on more risk and may charge higher interest rates to help balance out that risk.
“One of signature loans’ drawbacks is their high-interest rates in comparison to secured loans, such as home or car loans,” Kayikchyan said. “Many signature loans have fixed interest rates, which makes your monthly payment amount very predictable for the entire term of the loan.
“Make sure to find out if there are any additional fees associated with the signature loan, including a possible prepayment penalty. It is always better to have a choice to pay off the loan ahead of its schedule penalty-free to avoid paying unnecessary interest charges.”
The amount you can borrow with a signature loan varies widely by lender. You can find signature loans that range from $500 to $50,000 and even as high as $100,000. Your credit score, income, and your debt-to-income ratio (your monthly debt payments compared to your gross monthly income) can influence the loan amounts you’re offered.
A signature loan is a type of personal loan, but not all personal loans are signature loans — some personal loans are secured by collateral. Signature loans can be harder to qualify for than secured personal loans since the lender takes on more risk without collateral to seize. Because of this, you generally need to meet stricter eligibility requirements to get a signature loan.
If you decide a signature loan is right for you, it’s a good idea to shop around to find the best lender for your needs. You can generally get signature loans from:
Signature loans have advantages and disadvantages to consider.
Each lender has its own unique application process, but generally, you’ll take the following steps to get a signature loan:
- Check your credit score. Your credit score plays a significant role in your eligibility for a signature loan. A higher credit score increases your chances of approval and getting better interest rates. It’s a good idea to find out where you stand before you apply for a signature loan.
- Find a reputable lender. Compare lenders to find one that suits your needs. Look for lenders that offer competitive interest rates, flexible repayment terms, and good customer service. Many online lenders allow you to prequalify for a loan on their website to get a better idea of the rates you may be offered — all without affecting your credit.
- Gather the necessary documents. Before applying for the loan, prepare your proof of identity, proof of income, and proof of residency to speed up the application process. You may need a copy of your photo ID, pay stubs, and recent utility bills.
- Complete the loan application. Fill out the loan application form accurately to avoid any delays. Provide all the necessary information and documentation as requested to ensure a smooth process.
- Wait for loan approval. After submitting the application, the lender will review your information to determine if you qualify.
- Sign the loan agreement. If you get loan approval, carefully read the loan agreement to ensure you understand the terms before signing.
- Receive the funds. After signing the loan agreement, you’ll receive your signature loan funds. Many lenders can deposit the loan funds in your bank account as soon as the next business day, but others may take a few days to a week.
Yes, you may be able to get a signature loan from a lender that accepts borrowers with bad credit. However, it may still be more challenging to qualify for a loan, and you’ll likely pay higher interest rates if you have a bad credit score.
“While no one can discourage or encourage you to apply for any credit product, the chances of getting approved for an unsecured signature loan are very little with bad credit,” Kayikchyan said. “In some instances, if the bad credit is a result of high debt balances and not necessarily late payments, collections, or judgments, it is possible to get approved for a debt consolidation loan and pay off various obligations one might have and eventually improve their credit history.”
If you can wait to borrow the money, it may make more sense to take the time to boost your credit score before applying. You can do so in various ways, including paying your bills on time and paying down your current debts.