What is a Signature Loan?

Written by Jordan BlansitReviewed by Nathan Brown, CFP®Updated: 11th Apr 2022
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Sometimes in life, we need a little financial boost. But if you don’t want to risk your house for a loan, and if you need a little more than your measly credit card limit allows, where do you turn?

For some people, the answer is a signature loan.

What is a Signature Loan?

A signature loan – sometimes called a good faith or character loan – is a personal loan backed only by your signature and credit history as a promise to repay your obligation.

Typically, personal loans are structured as installment loans, meaning you pay off your debt in regular monthly increments.

Because you don’t have to put up collateral against your debt, signature loans are considered “unsecured” loans. These loans can provide peace of mind that you won’t lose your house, car, savings account, or other valuables if you can’t pay your debt.

But if you stop payment, your credit score will suffer the consequences, which can lead to increased interest rates (or application denials) in the future. And because lenders use your income and credit score to approve and set the terms of your loan, these debts are best suited for individuals with a regular paycheck and clean credit history.

How Does a Signature Loan Work?

To get approval for a signature loan, the lender will require you to provide your personal information, such as your income and debt-to-income ratio.

The lender will also evaluate your credit score and your credit history to determine your interest rate and how much they’re willing to lend you.

Typically, this sum ranges from a few hundred to a few thousand dollars. Once approved, they’ll collect your signature as “collateral” that you’ll repay your obligation and fund your loan in one lump sum.

Then, you’ll repay your debt over time in regular installments, usually over a course of two to five years.

Unlike some types of loans, signature loans come with fixed annual percentage rates, or APRs. This is the total cost of borrowing money from a lender, including interest and fees, and is built into your payments.

Usually, an “affordable” signature loan has an APR under 30%, though they can reach 36% or higher. But because lenders have no collateral to repossess in case of nonpayment, most signature loans come with higher interest rates than their secured counterparts.

What Can You Use a Signature Loan For?

Signature loans are designed to be highly flexible. While it’s recommended to only take out such loans when you need them, they can technically be used for anything (barring exempted expenses, such as higher education or car loans).

Some of the most common reasons to take out a signature loan include:

  • Covering emergency expenses such as a car repair or medical bill
  • Consolidating high-interest debts into one loan
  • Refinancing an existing loan at a lower rate
  • Funding expenses that improve your financial standing, such as home renovations or small business startup costs

Of course, if you want to pay for more frivolous expenses such as a wedding or much-needed vacation, you can do that, too! (Though, again, it’s not a recommended practice.)

Signature Loan Costs: What to Look Out For

All loans come with extra costs – it’s how lenders make their money. And as a rule, borrowers with the best credit get the best rates, while those with bad credit often face unfavorable terms and increased fees.

Interest Rates

Almost every loan charges interest to make the debt worthwhile for the lender. For signature loans, interest is reflected as APR, which bundles your interest rate and loan fees together.

The total cost is calculated according to your interest rate, principal amount (how much you borrow), and loan term (length of your repayment period).

Origination Fees

Some lenders charge origination fees to cover the costs of processing a new loan. Typically, individuals with bad or no credit, as well as those who borrow larger sums, can expect to run into origination fees more often.

Keep in mind that such fees may come out of your loan amount. For instance, if you apply for a $100 loan at 5% interest, you’d only receive $95 from the lender and you will still owe on the full $100. 

Late Fees

If you forget to pay your monthly bill on time, your lender may assess a late fee. One of the best ways to avoid such fees is to set up autopay or pay your bill a week early every month.

But if you do incur a late payment fee, you can expect to see the late payment show up as a ding on your credit report, too.

Prepayment Penalties

Some lenders may also charge an early payoff fee for fulfilling your debt ahead of schedule.

While these are rare with most reputable lenders, they do occur – but you may have to read the fine print to find them. And whenever possible, avoid lenders that charge such fees.

Where to Get a Signature Loan

Several types of institutions offer signature loans – but you want to do your research before selecting any lender.

Of particular note, stay away from payday lenders and pawnshops. These predatory companies often charge exorbitant interest rates (up to 400% APR or higher), assess bloated fees, and charge a little extra for the privilege of repaying over longer periods of time.

Instead, consider a reputable lender from one of the following categories.

Banks

Not every bank offers unsecured loans, but those that do tend to be picky about their clientele.

Many banks only offer such loans to current customers with good or excellent credit, measured by a FICO score of 690 or higher.

And those banks that offer signature loans to non-customers may entice you to become a member with rate discounts or higher loans amounts.

Credit Unions

Credit unions may offer lower interest rates and more favorable terms than their big bank cousins.

However, you’ll have to become a member to apply, and most cap their unsecured lending limits at $50,000. If you need more funding, you’ll need to go with one of the big guys.

Online Lenders

Online signature loans have become mainstream in recent years. These automated operations let you submit an online application with quick approval (pending a full credit check) and may offer up to $100,000 in one chunk.

Online lenders are often popular with those who maintain thin or spotty credit files. But be warned!

Many online signature loans come with higher interest rates than their brick-and-mortar cousins – though they often offer same- or next-day funding.

How to Apply for a Signature Loan, Step-by-Step

Applying for a signature loan is easy – so long as you do your homework.

#1. Compare Signature Loan Lenders and Rates

The first step of taking out any loan should be to shop rates and terms at different lenders.

Consider factors such as APR, late or prepayment penalties, and the lender’s reputation. You should also fill out a preliminary application to prequalify, which allows the lender to issue a soft credit check and estimate what you qualify for.

Note that you may want to check your credit score before applying so you have an idea of your options.

Many lenders will list their minimum credit score online, which helps you weed out “no-go” lenders upfront.

#2. Choose a Signature Loan Lender

After you’ve compiled a list of options, it’s time to whittle them down until you find the lender that offers the best rates and terms.

Keep in mind that a shorter loan termmay mean higher monthly payments, but you’ll likely owe less in interest.

#3. Submit Application and Supporting Documents

Once you’ve chosen your lender, it’s time to submit an application. Be prepared to provide:

  • Your name and contact information
  • Social Security number
  • Driver’s license or other identification
  • Details about the loan amount, purpose, and desired repayment term
  • Proof of income, such as a bank statement or paystub

The lender will then use this information to conduct a hard credit check (which may temporarily lower your score) and determine your official loan terms. Depending on the lender, this process may take minutes or up to a week.

#4. Sign Signature Loan Agreement

Once you’re fully approved, it’s time to sign for your loan. Online lenders do this digitally, but you may have to visit a brick-and-mortar branch if you apply with some banks.

Be sure to read the fine print before you sign for anything the underwriter forgot to disclose upfront, such as prepayment penalties, automatic payment requirements, or other fees.

#5. Receive Funds

Next, the lender will fund your loan. This may occur same-day, next-day, or within a week.

#6. Make On-Time Monthly Payments

Roughly 30 days after you receive your funds, you’ll have to start fulfilling your end of the bargain by making monthly payments.

Whenever possible, consider signing up for autopay, scheduling early payments, and even paying a little extra to ensure you avoid late fees.

What are the Advantages of Signature Loans?

Signature loans come with a number of advantages compared to other loans, including:

  • No collateral requirements
  • Fixed-rate interest bundled into your monthly payment
  • No use limits (barring student loans and some auto and home expenses)
  • Reasonable interest rates for those with excellent credit

What are the Disadvantages of Signature Loans?

But signature loans also carry a number of disadvantages, too, such as:

  • Higher interest rates (compared to other loans) due to a lack of collateral
  • Marks for late payments can stay on your credit report for years
  • Borrowers with poor credit may pay upwards of 36% APR
  • Some lenders assess additional fees such as origination costs or prepayment penalties

Are there Signature Loans for Bad Credit?

While you can obtain a signature loan with bad credit, the process may be more difficult than if you have a good credit score. Moreover, you’ll likely pay more in interest and additional fees.

Many bad credit lenders also require a cosigner to approve your application. But this can be a double-edged sword.

If you pay off your loan, increase your credit score, and take them out to dinner for doing you a favor, great!

But if you default, you tank your credit score, their credit score, and your relationship. That’s…less great.

What is the Difference Between a Signature Loan and a Personal Loan?

A signature loan is an unsecured personal loan that requires no collateral. However, they often require a higher credit score and/or charge higher interest rates to minimize potential losses.

How Much Money Can You Borrow on a Signature Loan?

Your credit history, income, the specific lender, and any prior history with the lender all play into your borrowing limit.

Signature loans can range from $250 to $100,000, though most lenders offer $50,000 or less per loan.

How Long Does It Take to Get Approved for a Signature Loan?

Depending on the lender and your borrowing request, you may receive approval in just minutes or in a few days.

Overall, you can expect online lenders and portals to provide the fastest results.

Bottom Line: What is a Signature Loan?

Signature loans can be a great lending tool if you have excellent credit, a regular income, and need a quick infusion of cash. But it’s only a short-term solution.

If you find yourself repeatedly taking out loans, you may consider asking for a raise, applying to a better-paying job, or cutting unnecessary expenses to reduce your lifetime interest payments.

Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.