What Is a Signature Loan? Pros & Cons

What Are Signature Loans? How Do They Work?; What are signature loans? Learn more about signature loans and how they work, including unsecured vs. secured signature loans, and loan rates.

Jamie CattanachUpdated August 15, 2022

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If you’re looking for a personal loan that doesn’t require collateral, signature loans are an option. In a signature loan, the money is loaned to you without you having to put down any kind of assets to secure it, such as your car or home. Because there’s nothing securing the loan, however, signature personal loan rates can be higher. Read on to learn more about how signature loans work and whether or not they might be a good fit for your own financial needs.

What is a Signature Loan?

Signature loans are personal loans that don’t involve any kind of collateral. Their name comes from the fact that they require little more than your signature to seal the deal.Signature personal loans are also sometimes called “character loans” or “good faith loans” because the lender is essentially relying on your character and good faith (as well as your credit score and income verification) as assurance that you’ll pay back the debt. So bear in mind that lenders will collect personal information about you and your income and pull your credit history before defining the loan terms and handing over the papers to be signed.This process is very different from the typical one for secured loans, like home loans or auto loans. With secured loans like these, your house or vehicle could be repossessed if you fail to make your payments.Since signature loans are riskier for lenders (because they don’t have physical assets that they can seize if you default), average signature loan interest rates tend to be significantly higher than the rates you might get for a secured loan. (Of course, as always, your specific interest rate, term and other conditions of the loan will depend on both the lender and your creditworthiness.) And it’s important to remember as a potential borrower that just because signature loans don't come with the risk of the repossession of your car or home doesn’t mean they’re risk-free for you. Negative behavior in regards to a signature loan can be listed in your credit history and lower your credit score for years to come. Signature loans typically range in amount from $500 to $50,000, though they tend to be in the lower part of that range.

How Do Signature Loans Work?

When you apply for an unsecured signature loan, the lender will take your personal information, verify your income and pull your credit report. These credit pulls do count as hard inquiries, which can result in your credit score dropping a bit.If you qualify for the loan, the lender will give you the interest rate and terms. If you accept them, then you’ll sign the papers (there’s the signature!), receive the funds and begin paying back the loan.You may have to pay an origination fee to process the loan at the start. Additionally, you may be on the hook for late payment fees if you’re late with your payments or early payoff fees if you want to pay off the loan in full before the term ends. It’s always worth reading the fine print carefully before you sign so you’ll know what to expect. Many signature loans are installment loans, which means that they’re paid back in the form of fixed monthly payments of a pre-set amount. A signature loan’s term — the amount of time during which you pay it back — might be as short as a few months or as long as five years.

Typical Signature Loan Requirements

The exact requirements you’ll need to meet in order to get a signature loan vary by lender. In general, however, you can expect to encounter the following signature loan requirements.

Credit Score

Because there is no collateral securing the loan, lenders will heavily weigh your credit score when determining your loan eligibility. To qualify, you will need good credit, typically a score of at least 600.The higher your score, generally the better your loan terms and interest rate will be.

Income

Lenders will also take into account your income in order to determine whether you have the necessary cash flow needed to repay the loan. Often, lenders do not state what their specific income requirement is and the amount required will vary by lender, though it can hover around $20,000.Evidence of your income may be requested in the form of pay stubs, W-2 forms, tax returns or bank statements.

Debt-to-Income Ratio

How much you’re bringing in isn’t all that lenders care about — they also want to see how much of your income is already tied up paying back existing debts. Your debt-to-income ratio reveals how much you owe across all forms of debt versus how much money you earn. Lenders’ requirements for this ratio will vary, but in general, the lower your debt-to-income ratio is, the better your odds at securing a loan and favorable terms will be.

Signature Loans vs. Personal Loans

Signature loans are very similar to the more general category of personal loans, which are typically unsecured loans. In fact, signature loans can in fact be considered a kind of unsecured personal loan, though the bank or lender may market them differently. Keep in mind, however, that it is possible for a personal loan to be secured, which is not the case with a signature loan.With both a signature loan and a personal loan that’s unsecured, your credit score will play a big role in whether you’re approved for the loan and your loan terms, including the interest rate. With unsecured loans in general, rates tend to be higher since it is a greater risk to the lender.

Pros and Cons of Signature Loans

Cons of Signature Loans	Pros of Signature Loans
Usually have higher interest rates than secured loans	No risk of any collateral being repossessed if your fail to repay
Can be harder to qualify for	Funds can be used for a wide variety of purposes

As with any other kind of loan, taking out a signature loan means going into debt — and that’s why it’s important to evaluate carefully before you jump in. Here are some of the pros and cons of signature loans to weigh before affixing your John Hancock to the paperwork.

Pros of Signature Loans

No collateral means that when you take out a signature loan, your house or car are not in danger of being repossessed.
Funds acquired through signature loans can be used for just about any purpose you imagine, giving them more flexibility than many secured loans.
Although signature loans tend to be pricier than secured loans, they may be less costly than carrying a balance on a credit card, which tend to have high APRs.

Cons of Signature Loans

Because they don’t have any physical collateral attached, signature loans usually carry higher interest rates than secured loans do.
Signature loans can be harder to qualify for than secured loans.
Depending on what you’re using the signature loan for, you might not see a return on your investment in the form of appreciation the way you would with, say, a mortgage.

Uses for Signature Loans

Unlike, say, student loans, signature loans can be used for just about any expense you desire, from taking a vacation to doing home repairs to consolidating your debt. More specifically, here are some common uses for signature loans:

Medical emergencies
Car repairs
Home repairs or renovations
Debt consolidation
Major purchases
Vacations
Wedding

This is one of the key differences between secured vs. unsecured loans: With secured loans, you may have to use the money for the secured asset (i.e. the house or the car you’re offering as collateral).

When Should You Consider a Signature Loan?

If you have a good enough credit history to qualify for a signature loan with favorable terms, a signature loan might be more cost-effective than funding your project using credit cards. A signature loan might be a good option for those looking to consolidate higher-interest forms of debt, such as credit card debt. This tactic can make it easier to get ahead on payments and possibly even save you money on interest over time, depending on the rate of your new loan and the existing loans you’d be using the signature loan to pay off. Some people also use signature personal loans as an unsecured business loan option, since personal unsecured loans can be easier to qualify for than loans built specifically for business owners, such as short-term business loans or emergency business loans. That’s because business loans generally require both your personal and business credit scores to check your eligibility, and if you haven’t been in business long, you may need to build your business credit before qualifying for such a loan.

Signature Loan Fees to Be Aware Of

Interest might not be all you’re paying for your signature loan. Signature loan fees to look out for include:

Origination fee: Though not all signature loans charge this fee, some lenders collect this cost to process a new loan. The fee is typically a percentage of your loan amount, and thus can cut into the amount you end up receiving.
Late payment fee: As you may have guessed, this fee could apply if you make a payment past the due date. This one is easy to avoid though if you stick to making your payments on-time (setting up autopay can help with this).
Early payoff fee: Also called a prepayment penalty, some lenders may charge you this fee if you pay off your loan before the term is up.

Applying for a Signature Loan

Signature loans are offered by a wide range of banks, credit unions and other financial institutions. They may also be marketed as unsecured personal loans. Again, keep in mind that their rates may be higher than those for other, secured loan products from the same lenders.Here are the general steps you may expect to take if you were to apply for a signature loan.

1. Check Your Credit Score

Before you dive into the process of applying for a signature loan, it’s a smart idea to check your credit score and take a look at your credit report. This can give you an idea of where you stand and if you are in a good position to get favorable loan terms before applying.Take this time to address any inaccuracies in your credit report if you spot them, and if your credit score isn’t quite where you’d like it to be, consider whether you can take the time to improve it before you move forward with getting a loan. For instance, you might focus on paying off some debt to lower your debt-to-income ratio or maintaining a streak of on-time payments to boost your payment history.

2. Gather Your Information and Documentation

Next up, you’ll want to get organized by collecting all of the documents lenders usually request and making sure you’ll have the necessary information on hand. You may be asked to provide the following:

Name
Contact information
Social Security number
Proof of income (tax returns, pay stubs or bank account statements)
Employer contact information
Proof of address (a recent utility bill, your lease or proof of home or renters insurance)
Proof of identity (driver’s license or passport)

You will likely also be asked for details on the loan you want, such as the amount you want and its intended purpose, as well as your desired term.

3. Shop Around and Compare Lenders

You’ll want to shop around and compare rates from a number lenders to ensure you end up securing the most competitive loan terms available to you. As you’re researching lenders, take a look at their requirements to see whether you could meet them. It can be smart to use lender prequalification to get a better idea of what loan terms you may qualify for. Prequalification does not require a hard credit pull, which means you can get some better information about your odds of approval before putting your credit score on the line.

4. Submit a Formal Application

Once you’ve narrowed it down as far as lenders, it’s time to fill out a formal loan application. This is when all of that information you collected earlier will come in handy, expediting the process of completing the application.At this stage, the lender will conduct a hard credit inquiry in order to determine how much they will lend you and the terms of your loan. This will lower your credit score, though typically only by a few points.

5. Receive Your Funding

If the lender approves you and the terms of the loan are to your satisfaction, you’ll sign the paperwork and receive your funding. Just make sure to take your time and read the fine print before agreeing to anything. Funds can be disbursed as soon as the day you’re approved for the loan, though it will depend on the lender.

The Takeaway

Signature loans — unsecured loans that require little more than your signature (and a favorable credit history) to seal the deal — are just one of many loan options that can help you fund important goals. Depending on what you’re trying to pay for and your own personal financial landscape, a signature loan may or may not be the best option for you.Lantern by SoFi helps match members with funding options, taking into account their unique personal financial interests. Fill out one simple form to compare personal loan rates from multiple lenders in our network.

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About the Author

Jamie Cattanach

Jamie Cattanach is a full-time freelance writer whose work has been featured at CNBC, Yahoo Finance, The Motley Fool, the Huffington Post and other outlets. At SoFi, she writes about investing, retirement, student loans and how to get your money right -- no matter what that means for you.

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