What Is a Signature Loan, and Is It the Best Option?
A signature loan could be a good choice if you want to borrow money without putting up your car or house as collateral.
October 19, 2022
Most Americans have taken out a personal loan for various unexpected expenses or even a much-anticipated home renovation. A signature loan is one type of unsecured personal loan available to borrowers, and it’s a viable option if you need to borrow money without collateral.
Like all types of loans, signature loans have their pros and cons. In this guide, we’ll outline what a signature loan is and how this type of loan works. We’ll also explore the pros and cons in depth, so you can decide if a signature loan is the best option for you.
What is a signature loan?
Signature loans are loans that don't require collateral. Instead, they’re secured only by your signature, which is a formal agreement to repay the money.
Alternatively, secured loans use assets like your home or car as collateral. If you default on a secured loan, the lender can take possession of the asset used as collateral.
You can use signature loans for anything from unexpected medical bills to debt consolidation. However, it’s important to note that unsecured loans often have higher interest rates than secured ones because the lender is taking on more risk.
How do signature loans work?
Before applying for your loan, it’s essential to understand the ins and outs of signature loans. Here’s a more detailed look at how they work.
Eligibility requirements
Signature loan criteria vary from lender to lender. They’ll look at your credit score, but they also want to see that you have a steady job and enough money to make your loan payments on time.
A cosigner or co-borrower can improve your chances of getting a loan or help you get a better interest rate. Some lenders may request documentation, such as your driver's license, income statements, passport, state-issued ID or federal tax return.
How much you can borrow and for how long
Each lender sets its own borrowing limits and loan terms. The loan amount you’re approved for will depend on your income and credit history. Here are examples of some of the borrowing limits and terms available from different lenders:
Elements Financial offers signature loans of up to $25,000 for 48 months.
F&A Federal Credit Union in California offers signature loans of up to $25,000 for 60 months.
SoFi offers unsecured personal loans that range from $5,000 to $100,000 with two- to seven-year terms.
LightStream offers $5,000 to $100,000 unsecured personal loans with varying loan terms.
Interest rates for signature loans
The fixed interest rate on signature loans depends on your credit score and income. Since there are no assets or collateral, your interest rate may be higher than it would be for a secured personal loan. You also might have a higher interest rate for a longer loan term.
Let’s look at some examples of signature loan interest rates as of September 2022:
Elements Financial’s signature loan APR is 8.91%, but they note that “each individual's Annual Percentage Rate (APR) is determined by the applicant's credit history. Not all applicants will qualify for our displayed lowest rates.”
F&A Federal Credit Union’s APRs range from 6.90% to 15.90% based on the borrower’s credit score.
SoFi’s APRs for unsecured personal loans range from 7.99% to 23.43%, with the exact rate determined by a borrower’s creditworthiness.
LightStream offers APRs that range from 5.73% to 19.99% depending on the borrower’s credit.
The best way to find a loan that fits your budget is by comparing the rates and repayment terms from different lenders. You should consider both the monthly payment and the total cost of the loan.
Can you get a signature loan with bad credit?
While getting a signature loan with bad credit is possible, the best rates are reserved for those with established creditworthiness. Without a good credit score, your rates will be higher.
If you have a bad credit score but can provide collateral, consider exploring a secured loan. The collateral you provide for a secured loan may incentivize the lender to charge a lower interest rate. In addition, secured loans are typically easier to qualify for than unsecured loans due to the lender's reduced risk.
Pros and cons of signature loans
Signature loans are better suited for some than others. Look at the pros and cons to help you decide if this type of loan is a good fit for your financial situation.
Pros
Interest rates for signature loans may be lower than credit card rates.
Signature loans do not require collateral.
You know how much you will pay each month and have a fixed rate for the loan term.
Funds may be available by the next business day.
There typically aren’t restrictions on what you can use the funds for.
Cons
Signature loans typically carry a higher annual percentage rate than secured loans.
It may be more challenging to get approved for a signature loan.
Lenders often conduct credit checks, which may temporarily lower a borrower's credit score.
Signature loans may be subject to origination fees, late fees and prepayment penalties.
Possible uses for a signature loan
If you’re like most people, you run short on cash from time to time. You can use the funds for a major purchase or any other type of financial need that may arise if you qualify for a signature loan.
Here are some of the most common reasons individuals apply for a new loan:
Unexpected medical expenses
Home improvement, maintenance and repair
Car repairs
Vacation expenses
College expenses, not including tuition
Debt consolidation
Who provides signature loans?
There are several sources where you can obtain a signature loan. Some options include credit unions, online lenders and local banks:
Credit unions: You can obtain a signature loan at your local credit union if you qualify. In addition, you might be able to get a lower rate than with some traditional banks. To be eligible, you must be a credit union member or apply for membership before you take out the loan.
Online lenders: It’s possible to find a signature loan through an online lender. In most cases, you can prequalify to check your interest rate without a hard credit check.
Local banks: You can try applying for a signature loan at your local bank. Ask a customer service representative about your loan options and whether they offer signature loans. In some cases, you might get a better rate for being an existing customer. In addition, some banks allow you to complete most of the application process through an online banking platform.
Steps for taking out a signature loan
There’s a process for applying for a signature loan. Here are the steps you'll need to take:
Check your credit: How’s your credit score? If there are inaccuracies in your credit report, contact the credit bureau and look into disputing the incorrect listings. You can view your annual credit report for free at AnnualCreditReport.com.
Shop for the best loan rates: Use comparison websites or visit local lenders to compare rates. In some cases, you can prequalify with only a soft credit check.
Apply for your loan: After finding the best signature loan rate, you’re ready to apply. You'll need to submit an application and provide all requested documentation (e.g., financial records and income statements).
Sign your paperwork and receive the loan funds: Once your loan is approved, the lender will prepare the necessary documents. Then, you'll be ready to review and sign the paperwork. Read the fine print to ensure you agree to all the terms and disclosures before signing.
Should you take out a signature loan?
The bottom line is that you will have to weigh the pros and cons to see if a signature loan is the best solution for your financial situation. For example, a signature loan could be right for you if you have excellent credit and don’t want to risk putting up your home or automobile as collateral.
If you decide to apply for a signature loan, you can secure the best rate by shopping around for the right lender.
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