A signature loan is a type of loan that’s backed by only your signature and credit. In other words, it’s an unsecured loan — meaning no collateral is required. This differs from a secured loan — like an auto loan — where you put up collateral and the lender can repossess it if loan payments aren’t made.
There are numerous ways to use signature loans, from home improvement projects to debt c🐼onsolidation to unexpected bills.
- How does a signature loan work?
- When should you consider a signature loan?
- Pros and cons
- Where can you get this type of loan?
- How to apply
- FAQ
How does a signature loan work?
Because a signature loan is an unsecured loan backed only by your credit and your promise to repay demonstrated by your signature, you’ll generally need good credit to qualify for one.
You’ll usually need a credit score in the 600s to qualify for a signature loan — FICO classifies a score of 670 or higher as a good credit score. Additionally, lenders will take into account your income, employment history, and debt-to-income ratio.
Those with higher credit scores will generally qualify for larger loan amounts and lower interest rates. Signature loan amounts vary by lender but typically range from $500 to $50,000, and you’ll receive that amount upfront as a lump sum. The average interest rate varies from 6.59% all the way up to 15.91%, depeౠnding on your credit s🐽core.
Signature loans are generally term loans, meaning repayment occurs over a set period of time in fixed monthly installments. Terms ♏generally range from ܫjust a few months to five years, though this can vary from lender to lender.
Signature loan vs. a personal loan
The category of personal loans is a broad one that can include both unsecured personal loans (which is what signature loans effectively are) as well as secured personal loans.
When should you consider a signature loan?
With a signature loan, you don’t have to worry about putting up collateral to secure the
loan and thus put an asset at risk of repossession in the instance of nonpayment. And if you have the credit to qualify for one, signature loans can be u🐻sed for a wide variety of purposes.
For instance, you might use a signature loan to consolidate existing debt, help pay for home renovations, or cover an unexpected or sizable expense, such as a surprise medical bill or an unanticipated car repair.
While your first instinct might be to pull out a credit card in any one of the💯se situations, signature loans generally have l𓆉ower interest rates.
| For example: Let’s say you need to borrow $5,000 to cover the cost of a porch repair. If you put that charge on your credit card with an APR of 20.82% and paid it off over 12 months, you’d owe a total of $582 in interest. Meanwhile, if you covered that same amount with a personal loan that had an interest rate of 11.50% and a term of one year, you’d pay $317 in total interest — $265 less than with a credit card. |
Still, it’s important to think carefully before taking on any debt. “Consider your repayment capabilities, the interest rates and fees associated with the loan, and the overall impact on your financial well-being before taking on any debt,” said Loretta Kilday, a litigator and transactional attorney, and financial expert with over 36 years of experience.
Pros and cons of a signature loan
There are bothღ benefits and drawbacks to using a signature loa🍌n.
Pros
- No need to put up collateral: Because signature loans are unsecured, there’s no need to put up an asset to back the loan.
- Flexibility: There are a wide variety of potential uses for personal loans, including debt consolidation, home improvement costs, and emergency expenses.
- Lower interest rates compared to credit cards: Signature loans tend to have considerably lower interest rates compared to credit cards. The average credit card interest rate was 20.68% as of May 2023, while the average personal loan rate was 11.48%, according to the . However, your interest rate will depend on your credit score, and those with higher scores tend to receive lower interest rates.
- Predictable monthly payments: Signature loans are generally term loans, meaning you’re assigned a set period of time over which you must repay the amount borrowed. You’ll have fixed monthly payments, with a defined end date. This can make budgeting easier.
Cons
- Higher interest rates (and lower amounts) compared to secured loans: Signature loans present a greater risk to lenders since they’re not backed by collateral. As such, they generally have higher interest rates compared to secured loans. Further, the loan amounts for signature loans might be lower than those offered for secured loans, according to Kilday.
- Generally need good to excellent credit to qualify: To get a signature loan, you’ll generally need to at least have good credit — 670 or higher. Secured loans tend to be easier to qualify for in comparison.
- May end up owing fees: It’s possible to owe origination fees, prepayment penalties, and other costs when taking out a signature loan. Fees can vary by lender, which is why it’s “essential to carefully review the loan terms and conditions to understand any additional fees that may be involved,” said Kilday.
- Potential damage to credit: Even though you won’t risk losing your collateral with an unsecured loan, there are still consequences for late payments. Alongside late fees, once you’re 30 days past due, any missed payments could appear on your credit report, thus harming your credit score and potentially leading to more serious consequences down the road.
Where can you get a signature loan?
It’s possible to get a signature loan from a few different types of financial institutions, including:
- Banks: You may be able to get a signature loan at the bank where you’re already a customer or at another bank that’s offering competitive rates and terms. To find out if a bank offers signature loans, contact the bank or visit its website.
- Credit unions: You typically have to become a member at a credit union to access its financial offerings, but doing so can have benefits. Generally speaking, credit unions tend to have lower loan rates and charge lower fees due to their lower overhead costs compared to for-profit banks.
- Online lenders: Online lenders are another option to explore for signature loans. Often, online lenders will allow you to prequalify for a loan, allowing you to see your potential rate and terms without a hard credit check (though keep in mind that a hard inquiry will be necessary if you decide to undergo the formal application process). Additionally, online lenders tend to have quicker funding times compared to traditional lenders.
How to apply for a signature loan
You may be able to apply for a signature loan online, in person, or over the phone. These are☂ the general steps:
1. Check your credit score: Before you begin the application process, it’s a good idea to check your credit score. You’ll generally need a credit score in the 600s to qualify for a signature loan, s🦄o🌟 look to see where you stand before taking the time to apply.
2. Compare lenders and prequalify: Look at rates and terms from various lenders, and consider prequalifying to get an idea of what loan amount and terms you may be offered. This can help you determine the best personal loans available to you.
3. Gather necessary information and documentation: You’ll typically need to provide personal information like a Social Security number or taxpayer identification number, as well as a form of ID. Additionally, you might be asked to provide information on and verification of your income and employer, like recent pay stubs, plus details on your financial obligations and assets.
4. Submit an application: Follow the prompts and provide the requested information in the designated fields. Once you apply, the lender ♓will conduct a hard inquiry, which can cause a temporary dip in your credit score.
5. Sign for your loan and receive funding: If your application gets approved, the final step is to sign a document detailing the loan’s terms and your obligations. You’ll then receive the loan funds, with the exact funding timeline varying by lender. In some cases, you may even receive the money the same day you sign your loan agreement.
FAQ
What credit score do you need to qualify for a signature loan?
Generally, to qualify for a signature loan you’ll need a FICO score of around 670. However, note that these requirements can vary from lender to lender.
Can you get a signature loan with bad credit?
Yes, it is possible to get a signature loan with bad credit. However, those with lower credit scores will generally qualify for sma👍ller loans with less favorable terms, such as a steep interest rate compared to what a borrower with good or excellent credit would qualify for.
How long does it take to get approved for a signature loan?
The timeline for approval varies depending on the lender. In some cases, you could get approved for a signature loa🍒n in just minutes or within a day, whereas in other cases, it can take a week🅺 or longer.
Can you use a signature loan for any purpose?
Depending on the lender, there may be some restrictions on the permitted uses of a signature loan. For instance, lenders may not allow you to use the funds to pay for college tuition, make investments, or partake in gambling or illegal activities. Further, while there are some things you can technically use personal loan funds for, you might think twice before doing so, such as leaning on a signature loan for everyday expenses or to pay for something you want but can’t necessarily afford, like a big vacation.
Are there any alternatives to signature loans for borrowing money?
Some signature loan alternatives you might turn to in order to borrow money include secured loans, credit cards, and a home equity loan or line of credit (HELOC). Just make sure you understand the🌄 pros and cons of each option before moving forward ꦡwith any one of them.