What is a Signature Loan?

You may not have heard the term “signature loan” before because it’s an older term that’s not used very often anymore, but you’ve probably had one and didn’t realize it. A signature loan is another name for a personal loan. Unlike some personal loans that can either be secured or an unsecured loan, a signature loan does not require collateral. The only assurance the lender has is the borrower’s actual signature on the personal loan promising to pay it back, hence the name.¹ For this reason, a signature loan has historically been referred to as a “character loan” or “good faith loan.”

How does a signature loan work?

Signature loans are considered term loans, which means that they’re paid off in monthly installments over a specific period of time. Generally speaking, they may have higher interest rates than loans that are secured with collateral. The repayment period on a signature loan can range from a few months to up to five years, depending on the lender.

What are signature loans used for?

Signature loans can be used just like other personal loans, including auto repairs, home improvements and major purchases. They can also be taken out in the event of an emergency.

Another purpose for this type of loan is debt consolidation, which refers to the process of taking out a new loan to pay off preexisting debts. Consolidating your debt could simplify your bills, save you money and make your finances easier to manage.

So how much can you borrow with a signature loan? As with any other personal, unsecured loan, a signature loan can typically range from $500 to $50,000.

Pros and cons of signature loans

Pros:

• No collateral: No need to risk your assets.
• Versatile use: Use the funds as you see fit.
• Quick access: Faster approval and funding processes.
• Predictable payments: Fixed interest rate and monthly installments.

Cons:

• Higher interest: Typically higher due to no collateral.
• Lender fees: Lenders may charge late fees, prepayment penalties, origination fees.
• Loan limits: Borrowing limits may not cover large expenses.
• Debt accumulation: Easy access to funds may result in more borrowing, which can lead to excessive debt if not managed.

How to get a signature loan

In order to qualify for a signature loan, you will need to meet the lender’s income and credit qualifications.

With a signature loan, the lender is trusting that you are a responsible borrower and will pay back the money. The lender takes on more risk with a signature loan because it is unsecured, which means it doesn’t require any collateral like a house or car to recoup the funds if you default on the loan.

Think about it: If a friend asked to borrow some money without any collateral, you’d consider their track record of financial responsibility before saying yes. The same theory applies here.

Before applying for a signature loan, take a moment to assess your current financial situation. Approval is not guaranteed, and each lender has its own criteria for loan approval.

Here are some general steps to get a signature loan:

1. Shop around for lenders: Before you apply, it’s always a good idea to compare lenders for the rates and terms that suit your financial situation.
2. Gather necessary documentation: Prepare documents that prove your identity, income, and employment status. Each lender will have their own set of criteria for what documents are acceptable.
3. Apply for the loan: Once you choose a lender, complete the application process. This can usually be done online. Be sure to fill out the application accurately to avoid delays.
4. Review the loan agreement: If approved, carefully review the terms of the loan agreement, paying close attention to the interest rate, fees, repayment schedule, and any penalties for late payments.
5. Accept the loan: If the terms are acceptable, you can sign the agreement (often electronically). After this, the funds are typically deposited into your bank account within a few days.

Personal loans vs signature loans – how do they compare?

Technically, yes, signature loans are a personal loan, but most lenders do not use the term signature loan. However, there are a few differences to factor in when you ask, “*is a signature loan a personal loan?*”

“Personal loan” is a broad category that can apply to either secured or unsecured loans. A signature loan is an unsecured personal loan because it relies solely on the borrower’s signature and promise to pay as the guarantee. Think of it like this: all signature loans are personal loans, but not all personal loans are signature loans.

Is a signature loan right for you?

If you qualify for a signature loan, it can be a powerful tool for consolidating debt and taking care of significant expenses. Now that you know the meaning of "signature loan" and have a better understanding of how to get a signature loan, you can decide if it is a good fit for you.