A signature loan is a type of unsecured loan, which means that it does not require collateral. The only assurance the lender has is the borrower’s “signature” on the loan promising to pay it back, hence the name. For this reason, they are also known as a “character loan” or “good faith loan.”
How does a signature loan work?
Signature loans are considered term loans, which means that in most cases you pay them off in monthly installments over a specific time frame. Generally speaking, they also have higher interest rates than loans that do require collateral.
One important feature that distinguishes a signature loan from other types of loans is that once the balance is paid off, you’re done. There is no ongoing line of credit like there is with a credit card or a revolving loan.
If you’re approved, you will usually get your money faster than you would with many other types of loans, which makes them an attractive option for borrowers who need access to funds on short notice.
What are signature loans used for?
Signature loans can be used for the same things as many other types of loans, including home repairs, improvements, and major purchases that are too big to put on a credit card. They can also be taken out in the event of an emergency.
Another purpose for this type of loan is debt consolidation, which involves taking out a new loan to pay off preexisting debts.
According to Experian, most signature loans tend to be smaller than other types of loans.1 Getting a larger one is possible, but they are less common due to the lack of collateral.
So, how do you get one?
They’re called “character loans” for a reason; with this type of loan, the lender is trusting that you are a responsible person and will pay back the money. This type of loan is by nature a bigger risk for the lender.
Think about it: If a friend asked to borrow some money, you’d take his character and financial responsibility into consideration before saying yes. It’s the same thing here. So, to be trusted with a signature loan, you must have a good credit score and a good account standing with the bank or lender in order to qualify.2
Personal loans vs. signature loans — how do they compare?
This can get a little confusing because “personal loan” is a broad term that can apply to a lot of different kinds of loans. Technically, signature loans are a type of personal loan.
The key difference is that some personal loans do require some form of collateral. A signature loan does not and also has important requirements that a borrower must meet in order to qualify (good credit, good standing with lender, etc.).
Outside of personal loans, other types of loans like payday loans do not have these kinds of requirements. In some cases, all a borrower has to do is prove they have some form of stable employment or income (and provide collateral, if required). Payday loans however typically require the borrower to pay them back very quickly and have vastly higher interest rates than other types of loans.
Is a signature loan right for you?
If you are able to qualify for one, they can be a powerful tool for consolidating debt and taking care of significant expenses. Now that you have a basic understanding of what signature loans are and how to get one, take a look at your own financial situation and decide if it is a good fit for you.
1 Experian, “What is a Signature Loan?,” https://www.experian.com/blogs/ask-experian/what-is-a-signature-loan/
2 Zacks Investment Research, “What is the Difference Between a Signature Loan and a Short-term Loan?,” https://finance.zacks.com/difference-between-signature-loan-shortterm-loan-1211.html
