Personal Signature Loan: Is It Different From a Personal Loan?
A personal signature loan is a relatively common type of loan, but is it the right option for you?
Contributing Writer at Tally
October 25, 2022
You have a wide range of lending options when the need for cash strikes, including various personal loans and lines of credit. One such loan that may seem enticing is the personal signature loan because it doesn’t require collateral.
But is a personal signature loan really worth it, and how does it compare to a standard personal loan? We explain this and more about personal signature loans below.
What is a personal signature loan?
A personal signature loan, or simply a signature loan, is a personal loan you get from a financial institution — e.g., a bank, lender, or credit union. All you give the institution in return is a signature on a promissory note. The financial institution won’t put liens on any collateral for this loan, making recovering the loan balance difficult if you default.
This is sometimes referred to as an unsecured loan.
What’s the difference between a personal loan and a personal signature loan?
A personal signature loan and a personal loan share many similarities, as they are both personal loans. However, there’s one key differentiator: a personal loan can be either an unsecured or secured loan. The latter means there’s collateral the lender can take and liquidate to recoup any lost money due to default.
This collateral could be a car, business, home or any other sellable property with equity.
On the other hand, a signature loan is always an unsecured personal loan based on good faith. This type of loan is riskier for lenders.
What credit score do I need to get a personal signature loan?
There’s no hard rule on the credit score you need to get a personal signature loan, but most lenders will set their minimum credit score requirement at 580.
Some lenders will approve you if your score is as low as 300, but this loan typically includes a high origination fee and interest rate. The lower your credit score is, the riskier you’re seen to be, and the higher the fees and annual percentage rate (APR) typically are.
Remember, a satisfactory credit score isn’t the only factor that goes into getting approved for a personal signature loan. You must also meet the lender’s credit history and income requirements. These can include the following:
No bankruptcies, foreclosures or repossessions within a certain period
No late payments within a specific period
A satisfactory debt-to-income (DTI) ratio
A satisfactory credit utilization ratio
Given you meet the minimum credit score and the other creditworthiness and income requirements the bank sets forth, you should be able to get approved for a personal signature loan.
How does a personal signature loan affect my credit report?
A personal signature loan will affect your credit in the same way as many other loans. Let’s look at some of the positive and negative credit score impacts you can expect.
Potential negative credit score impacts
Obtaining a personal signature loan can have a few negative impacts on your credit score, starting from the day you initially apply for the loan. Here are the negative impacts of a signature loan on your credit score.
The amount-owed variable comprises 30% of your FICO credit score, making it the second-most important variable. While this variable primarily looks at your credit utilization ratio, which a personal signature loan will not affect, it still accounts for all your credit balances. The higher your credit balances are, the more negatively it can impact this factor and potentially lower your credit score.
Adding a new signature loan amount to your credit report will increase your credit balances.
Hard credit inquiry
The first thing you’ll need to do when completing a loan application for a personal signature loan is to go through a hard credit inquiry — when the lender pulls your credit report and reviews your creditworthiness. This goes beyond just your credit score; the lender will check your entire credit report and compare it to their credit requirements.
A hard credit check may cause a less-than-5-point drop in your FICO credit score and can impact your score for up to 12 months.
Once the lender issues your loan, you’ll have a brand-new loan account on your credit report, which can impact two variables that make up your FICO credit score.
First, it can shorten your length of credit history, which makes up 15% of your FICO Score. This factor looks at a range of information, including:
How long your accounts have been open
The age of your oldest account
The age of your newest account
The average age of all your accounts
How long specific types of credit accounts have been open
How active each account is
Second, it can impact the new credit variable, which makes up 10% of your FICO Score. This variable looks at a wide range of factors, but the one that matters most here is the age of your most recently opened account. The newer the account, the more it negatively impacts this variable and can lower your credit score.
Potential positive credit score impacts
Getting an unsecured personal signature loan may also have a few positive credit score impacts. Let’s explore how you could improve your credit score with this loan.
Lower credit utilization ratio from debt consolidation
Your credit utilization ratio, which is the amount of revolving debt — credit cards and lines of credit — you have relative to their credit limits, is a big part of the amounts-owed variable of your FICO Score. If you take out a personal signature loan and use it as a debt consolidation loan to pay off these balances, you’ll see your credit utilization ratio drop.
If you make a big-enough reduction in your utilization ratio, you could see your FICO Score tick upward.
Another variable in determining your FICO Score is credit mix, which is the balance of installment and revolving debts. Adding an installment debt, like a personal signature loan, could boost your credit score if you have an imbalance due to excessive revolving debts.
Given credit mix accounts for only 10% of your FICO Score, the increase may be slight.
Your payment history makes up 35% of your FICO Score and is the highest weighted variable. If you make consistent on-time payments according to your signature loan terms, you could improve this variable and see credit score increases over time.
When does a personal signature loan make sense?
Generally, you don’t want to carry debt, but there are situations when getting a personal signature loan may make sense. Here’s when you might want to consider one.
You want to make home improvements that increase your property value
If your home needs updating or repairs that can increase or restore its value, it’s generally worthwhile doing it. But not everyone has the cash to handle these repairs, and some will need a loan. If you can’t get a home equity loan (HEL) or home equity line of credit (HELOC), a personal signature loan may make sense.
Review the loan terms carefully to get the total loan cost, including all fees and interest. If this amount is less than the anticipated home value increase when you complete the repairs or improvements, this makes that unsecured personal loan a good debt.
Also, since it’s an unsecured debt, there’s little risk of losing your home if you default.
You want to consolidate high-interest debt
A personal signature loan could be a good option if you have high-interest debt, such as credit cards or lines of credit, that you want to consolidate.
Before taking out the signature loan, verify that it has a lower interest rate than the debts you’re refinancing. Then, ensure it’s a fixed-rate loan and doesn’t have variable interest rates. Finally, check your budget to see if you can afford the monthly payments.
If all those prove true, it may be worthwhile to use this loan to pay off your debts in one lump sum and make the loan payment in place of the high-interest debt payments.
You don’t have assets for a secured loan
Suppose you can’t get approved for a lower-interest-rate secured loan because you have no assets the lender is interested in using as collateral. In that case, a personal signature loan could be a good alternative. But be mindful of the interest rate and other fees associated with this unsecured personal loan, as they’ll likely be higher than you’d expect from a secured loan.
When does a personal signature loan not make sense?
There are also times when a signature loan just doesn’t make sense. Here are some situations when you should skip this type of loan.
You have plenty of collateral
If you have equity in your home, car or business — meaning you owe less than it’s worth — and can get approved for a secured personal loan, that’s generally a better option. The reason is because an unsecured personal signature loan will likely have a higher interest rate and more fees, making it a worse value.
You want to finance an impulse buy
Impulse buys are generally poor financial decisions. Not only can they strain your budget, but they can push you to take out unnecessary loans to get that instant gratification. This is why you should avoid taking out a personal signature loan to make an impulse buy.
Instead, save the money needed to buy the item over time. This will help you avoid interest fees and stress. Plus, it’ll give you time to think about whether the purchase is a wise decision or not.
The loan has excessive fees
Loans have fees. That’s just the nature of the lending business. However, there are normal fees, then there are predatory fees. For a personal loan, you can generally expect a 1% to 10% origination fee and that’s about it. However, if you see an origination fee exceeding 10% or other unusual fees, like a prepayment penalty, it’s best to avoid that loan.
You have bad credit
Bad credit already makes lenders leery of lending you money. Add in the fact that a personal signature loan is 100% based on good faith, making lenders even more cautious, and this can lead to extraordinarily unfavorable loan terms — high interest rates, large origination fees, and other costs.
You need to finance a home or car
Mortgages and auto loans are traditionally secured loans with lower interest rates and fees. Getting a large personal signature loan to finance these purchases instead will usually cost you more in the long run.
Personal signature loans can help, but not always
Personal signature loans are convenient ways to finance without having to risk collateral. However, there are times when they may not be the best option. You may be able to save money in the long run by choosing a different type of loan or financing.
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†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.