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What Are Signature Loans? How Do They Work?

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Jamie Cattanach

Jamie Cattanach

Updated July 9, 2021
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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.
f you’re in the market for a loan, you may have noticed that there are a whole lot of different kinds out there. Student loans, mortgages, and lines of credit are some of the options that are familiar to most consumers. But if you’re looking for a personal loan, signature loans are another lending option. In a signature loan, the money is loaned to you without you having to put down any kind of collateral to secure it. 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. They’re 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 mortgages 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 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, so it’s important not to apply for a small number of loans within a short period of time to minimize any negative effect on your score.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 the loan back. You may have to pay an origination fee to process the loan at the start. And you may also 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 typically be as short as a few months or as long as five years.

What Kind of Loans Are Signature Loans?

Signature loans are by definition unsecured. They can be used for just about any expense you desire, from taking a vacation to doing home repairs to consolidating your debt. 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). In this way, signature loans are very similar to the more general category of personal loans, which are typically unsecured. Signature loans can in fact be considered a kind of unsecured personal loan, though the bank or lender may market them differently.

Pros and Cons of Signature Loans

As with any other kind of loan, taking out a signature loan means going into debt—and that’s a step 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, for which the average APR sits between 15.56% and 22.87% as of June 4, 2021, per U.S. News & World Report.

 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. 

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 of 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. 

Where Can You Get 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.

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 good funding options for them, taking into account their unique personal financial interests. Fill out one simple form to compare loans from multiple lenders in our network
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC21031

About the Author

Jamie Cattanach

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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