What Is a Signature Loan? Pros and Cons

If you’re looking for a personal loan that doesn’t require collateral, signature loans are an option. With a signature loan, the money is loaned to you without you having to put down any kind of asset to secure it, such as your car or home. Because there’s nothing securing the loan, however, signature personal loan rates may 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. They 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 of your ability to pay back the debt.

Since signature loans are riskier for lenders, the average signature personal 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, your term, and other conditions of the loan may depend on both the lender and your creditworthiness.)

Signature loans typically range from $100-$100,000, with terms of three months to eight years.

How Do Signature Loans Work?

When you apply for an unsecured signature loan, the lender may take your personal information, verify your income, and pull your credit report. These credit pulls do count as hard inquiries, which could result in your credit score temporarily dropping.

If you qualify for the loan, the lender may give you the interest rate and terms. If you accept them, you 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 know what to expect.

Typical Signature Loan Requirements

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

Credit Score

Because there is no collateral securing the loan, lenders may heavily weigh your credit score when determining your loan eligibility. To qualify, you may need good credit, typically a score of at least 580.

The higher your score, generally, the better your loan terms and interest rate may be.

Income

Lenders are also likely to 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 may vary by lender and the amount you want to borrow.

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 determine 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 may vary, but in general, the lower your debt-to-income ratio, the better your odds at securing a loan with favorable terms may be.

Signature Loans vs Personal Loans

A signature loan is a type of unsecured personal loan, with lenders relying solely on the borrower’s creditworthiness and signature as a promise to repay. Personal loans, on the other hand, include both secured and unsecured loans, including signature loans.

With both a signature loan and a personal loan that’s unsecured, your credit score may 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 than with secured loans since they are a greater risk to the lender.

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 why it’s important to evaluate carefully before you jump in. Here are some of the pros and cons of signature loans.

Pros of Signature Loans

• No collateral means that when you take out a signature loan, your house or car is not in danger of being repossessed.

• Funds acquired through signature loans may be used for just about any purpose.

• Although signature loans tend to be pricier than secured loans, they may be less costly than carrying a balance on a credit card, which tends to have high annual percentage rates (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 may be harder to qualify for than secured loans.

• Credit score is weighed heavily when determining whether or not you qualify.

Uses for Signature Loans

Signature loans may be used for just about any expense, 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

• Weddings

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 could 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 a signature personal loan as an unsecured business loan option since personal unsecured loans may be easier to qualify for than loans built specifically for business owners. 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, may 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 could help with this.

• Early payoff fee: Also called a prepayment penalty, some lenders may charge this fee if you pay off your loan before the term is up.

Applying for a Signature Loan

A wide range of banks, credit unions, and other financial institutions have signature loan options. They may also be marketed as unsecured personal loans. Again, keep in mind that their rates may be higher than 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 could 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 could take the time to build your credit score 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 may want to get organized by collecting all of the documents lenders usually request and making sure you 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’re also likely to be asked for details on the loan you want, such as the amount you want and the loan’s intended purpose, as well as your desired term.

3. Shop Around and Compare Lenders

You may want to shop around and compare rates from a number of lenders to ensure you end up securing a competitive loan term. As you’re researching lenders, take a look at their requirements to determine whether you could meet them.

It may 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 could 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 may come in handy, expediting the process of completing the application.

At this stage, the lender may conduct a hard credit inquiry in order to determine how much they are prepared to lend you and the terms of your loan. This may 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 sign the paperwork and receive your funding. Just make sure to take your time and read the fine print before agreeing to anything.

Funds may be disbursed as soon as the day you’re approved for the loan^,, though it generally depends on the lender.

The Takeaway

Signature loans — unsecured loans that require your signature and a favorable credit history to seal the deal — are just one of many loan options that could 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 right 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.