What Is A Signature Loan, And How Does One Work?
Perhaps you need a fast loan for an emergency or personal reasons but you’re a bit nervous about putting up collateral. What if we told you about a financing option that required little more than your handwritten signature to secure the loan? Dubbed a “signature loan,” this type of financing can provide you the funding you need without you having to worry about losing a valuable asset to a lender if you default.
Let’s take a closer look at how signature loans work and what you need to apply for one so you can determine if this is the right financing option for your needs.
Signature Loan: Definition
A signature loan, also sometimes called a “good faith” loan, is an unsecured loan that you can typically apply for with just your credit history and signature, no collateral required. Lenders approve signature loans based on a borrower’s income and creditworthiness, with the signature acting as a promise of repayment.
Personal Vs. Signature Loan
How Do Signature Loans Work?
Signature loans are installment loans, where the borrower is paid in a lump sum and repays the loan through predetermined monthly payments. These loans are typically short-term, with a repayment period often lasting no more than 5 years.
Since no collateral is needed, a signature loan’s terms and interest rates will depend largely on a borrower’s credit score. Signature loans often come with more rigid credit requirements and higher interest rates than secured loans since there’s no collateral to assure repayment. However, interest rates are often fixed, so your monthly payment should stay the same for the life of the loan.
With a secured loan, being late on your monthly payments or stopping them altogether would result in your lender seizing your collateral. This won’t happen with an unsecured signature loan, but missing payments will put negative marks on your credit report. Failure to repay a signature loan can stay on your report for 7 years, making it difficult to get approved for future loans, including a mortgage.
What Can A Signature Loan Be Used For?
Like most personal loans, a signature loan can be used for almost anything that the borrower needs money to fund. Common uses for a signature loan include:
- Debt consolidation: Borrowers trapped in a cycle of credit card debt can consolidate their debt with a signature loan, potentially turning multiple monthly payments into one.
- Home improvements: Some homeowners will take out personal loans for home improvement projects.
- Emergency expenses: Whether you or a family member is hospitalized or your car requires immediate repairs, a signature loan can help cover unexpected expenses.
- Major life events and purchases: Weddings, anniversary parties or a move to another state may require funds you don’t have at the moment but that a signature loan can provide. A signature loan can also help you make major purchases like buying a car. Just make sure you borrow only an amount you can repay.
Where To Get A Signature Loan
Signature loans are available through traditional banks, credit unions and online lenders. When shopping for signature loans online, be sure you’re working with a reputable lender.
How To Get A Signature Loan
Getting a signature loan follows essentially the same process as applying for a personal loan. Take your application process step-by-step to ensure you end up with the loan that’s right for you.
- Check your credit report. Approval for a signature loan primarily depends on having a healthy credit score – 650 or higher for some lenders. Review your credit report to make sure you have an acceptable score.
- Get prequalified. Prequalification allows you to see an estimate of the rates and terms for which you’re eligible with a lender. You should become prequalified with multiple lenders to land the best loan for your situation.
- Submit an application. Once you’ve found the right lender, submit a full loan application with all the necessary documents and information. Lenders will perform a hard inquiry credit check when reviewing your application, which will likely lower your credit score slightly.
- Sign for your loan. If you’re approved for the loan, your lender will send you a formal document to sign. It’s always best to read the fine print before signing your name. Once signed for, your approved loan amount will typically appear in your checking account in 1 – 7 business days. The money is then yours for its intended purpose.
- Start making your monthly payments. Soon after receiving your funds, you’ll have to start making your monthly payments. Always keep up with these payments to avoid potential damage to your credit score.
FAQs About Signature Loans
How much money can I get on a signature loan?
Offered loan amounts can vary between lenders, but you typically can apply for a $1,000 – $50,000 signature loan. The amount you will be able to borrow will also vary based on your credit history.
Can I get a signature loan with bad credit?
The standard credit score needed for a good interest rate is often between 600 - 700. You may still get approved for a loan with lower credit, but you’ll pay more in interest. You’ll be better off building up your credit before applying for a signature loan.
Do signature loans hurt my credit?
Signature loans can leave long-lasting marks on your credit report if you miss your payments, and these marks can remain on your report for 7 years. You can avoid this by staying vigilant with your monthly payments.
Your credit score will also be unavoidably affected by a lender’s hard inquiry when you apply for the loan, but this is on a much smaller scale and for a shorter amount of time.
The Bottom Line
If you need money quickly and are hesitant to risk a valuable asset, a signature loan could be the funding you seek. However, before choosing this option, make sure your credit is healthy and that you have the income to make your monthly payments. Remember that signature loans are short-term financial solutions, so it’s wise to only apply if it’s right for your situation.
Want to see if you qualify for an unsecured personal loan? Get prequalified with our friends at Rocket Loans℠ and see your rates and terms.