What is a Signature Loan?
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Summary:
A signature loan is an unsecured loan that does not require collateral, such as a house or car. Because of this, signature loans tend to have higher interest rates and shorter terms than secured loans. However, you can still get excellent rates and terms if you have good credit.
Also known as a “character” or “good faith” loan, a signature loan is secured only by your promise to pay it back. In other words, your signature is essentially your collateral.
If you have a pretty good credit history and a decent income, signature loans are relatively quick and easy to get. Keep in mind, though, that signature loans generally come with a higher interest rate than secured loans.
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What is a signature loan?
A signature loan is just a another name for an unsecured loan that doesn’t require collateral, like a car, boat, or house. Because they’re unsecured, signature loans tend to be smaller, with shorter terms, and carry higher interest rates. However, they still have much better rates than credit cards and payday loans.
For individuals with excellent credit, there are opportunities for larger loans with competitive rates and terms. Signature loan interest rates are very low if you compare them to 20 years ago when they were 4 percentage points higher than now.
While signature loan limits typically range from $500 up to $100,000 (or more), the majority are on the lower end because of the increased risk to the lender.
However, these loans also pose a risk to the borrower. If you’re late on payments or default, the bank can’t repossess your car, but they can and will report you to the major credit agencies. Once this happens, your credit score takes a significant hit and you will feel the effects for years to come.
Who are signature loans for?
Generally speaking, the ideal borrowers for signature loans are individuals with good or excellent credit scores and a reliable income source. After all, the lender must reasonably believe the borrower will repay the loan before lending any funds.
A borrower with bad credit or a low income is not as likely to get approved for a signature loan, because a lender will view them as a poor risk. Having said that, a person with poor credit can still obtain an unsecured loan, but the lender will require higher interest rates and may not provide the full loan amount. This makes the loan much more expensive overall.
What are signature loans typically good for?
Signature loans are useful for many occasions. Maybe you want to give your daughter the wedding of her dreams, or you need some expensive dental work that is not covered by insurance. They can also be great for home repairs, debt consolidation, educational expenses, or emergency situations.
What is the difference between a personal loan and a signature loan?
A signature loan is an unsecured personal loan. You can have either a secured personal loan—a loan backed by collateral—or an unsecured personal loan. Although Signature loans (a.k.a. good faith loans) are unsecured installment loans. Sometimes signature loans are used by subprime lenders as another term for payday or cash advance loans. However, if you have excellent credit you can get a signature loan with rates similar to home equity loans without having to risk your home.
What are the pros and cons of a signature loan?
Does a signature loan sound like the solution to your financial problems? Before you agree to any loan terms, consider these pros and cons.
Where can I get a signature loan?
Most financial institutions offer these loans, including banks, credit unions, and online lenders. You may even want to start by asking your own bank or credit union. Lenders tend to look more favorably on familiar applicants, especially those who have previously repaid a loan from them.
However, be careful how many lenders you apply with when shopping for a signature loan. Some lenders require a hard credit pull to give you a loan offer. The good news is SuperMoney allows you to check your rates and terms with leading signature loan providers without dinging your credit score.
Pro Tip
Before looking for a lender, check online for your free credit score report. Not only will this indicate whether you will be approved, but you can also get an idea of the interest rates your lender will require.
What should I look for in a signature loan?
Signature loans vary by lender, which means you’ll need to compare a lot of numbers and term information. Here are a few things to look out for as you do your research and shop around for the best deal on a signature loan.
- Interest rate. Obviously, look for the lowest interest rate possible. They vary by lender, so try to find the best offer available to you.
- Paperwork. Have all of the necessary documentation handy that a lender might need to process your application. This will likely include contact information, social security number, and proof of income.
- Origination or other fees. Read the fine print on everything and find out if a lender charges an origination fee or prepayment penalties. You’ll want to try and find a bank that minimizes extraneous expenses if possible.
Ultimately, whether you’re applying for an unsecured or secured personal loan, comparing multiple lenders is always a smart decision. Here is SuperMoney’s list of the best signature loans currently available.
How long does it take to get approved for a signature loan?
Despite the stringent qualifications, approval for signature loans is pretty quick. The application process is not as long as that of a mortgage, for example, and often the loan application can be filled out in just a few minutes online. Final approval could come as soon as the next day or at most a week or two.
What credit score do you need to get an unsecured personal loan?
Since a signature loan is unsecured, your credit score will need to be pretty high to qualify for a signature loan. Most lenders require a score of at least 600 (often much higher). Plus, keep in mind that the lower the credit score, the higher the interest rate.
How can I get more favorable loan terms?
If you want to take out a signature loan, but you’ve checked your credit score and it’s not very good, there are things you can do to improve it.
- Improve your credit score. You can do this by paying off a credit card or repaying other debts over a longer period of time. If possible, ask a friend or family member to list you as an authorized user on their credit card. You don’t even have to use the card to benefit from your mom’s good credit.
- Get a loan co-signer. This can be difficult for some, but if you have a family member with great credit who trusts you, your odds of being awarded a loan increase tremendously.
- Pre-qualification. By filling out a short application and allowing for a soft credit check, you can see what loans you qualify for.
Is a signature loan a good idea?
A signature loan can be a smart move when you use it to reach a financial goal, such as consolidating debt or investing in a home improvement. It can even save you money if you use it to pay off higher interest debt, such as credit card debt. Most credit cards carry high interest rates (an average of 16%), but you can get a signature loan with APRs as low as 3% if you have excellent credit.
Key Takeaways
- A signature loan is an unsecured personal loan, which means it’s not backed by any collateral such as a car or a home.
- Interest rates are typically higher for unsecured loans because they are a greater risk for the lender.
- A signature loan can be a smart way to competitive rates and terms without risking your home as collateral.
- Your personal banks or credit unions are a great place to start looking for an unsecured loan.
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