Signature Loan: What Is It And How Does It Work?

Perhaps you need a fast loan for an emergency or personal reasons but you’re a bit nervous about putting up collateral. Well, there’s good news: You may be able to access a financing option that requires not all that much more than your handwritten signature. 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 on your loan payments.

 

Let’s take a closer look at how signature loans work and what you need to apply for one. This way, you can determine whether this is the right financing option for your needs.

What Is A Signature Loan?

A signature loan, sometimes called a “good faith” loan, is an unsecured loan you can apply for with 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

A signature loan is a type of personal loan, and some lenders refer to it as simply an “unsecured personal loan.”

How Do Signature Loans Work?

Signature loans are installment loans, meaning a lender pays a borrower in a lump sum and the borrower repays the loan through agreed-upon 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 term length and interest rate will depend largely on a borrower’s credit score. Signature loans come with more rigid credit requirements and higher interest rates than secured loans since they don’t require collateral to assure repayment. However, if your interest rate is fixed as is typically the case, 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 hard to get approved for future loans, including a mortgage.

What Can A Signature Loan Be Used For?

As with most personal loans, you can use a signature loan for almost anything you need the money for. Signature loans often pay for or allow for:

With any type of loan you get, 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, only do so with reputable lenders.

How To Get A Signature Loan

Applying for and being approved for 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.

1. Check Your Credit Report

Approval for a signature loan primarily depends on having a healthy credit score. For some lenders, that means a score of 650 or higher. Review your credit report to make sure you have an acceptable score.

2. Get Prequalified

Prequalification allows you to see an estimate of the rate and term for which you’re eligible with a lender. You should become prequalified with multiple lenders to land the best loan for your situation.

3. 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, likely lowering your credit score slightly.

4. 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.

5. 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 damaging your credit score.

Signature Loan FAQs

Lastly, let’s check out the answers to some frequently asked questions about signature loans.

How much money can I get on a signature loan?

Offered loan amounts vary from lender to lender, but you typically can apply for a $1,000 – $50,000 signature loan. The amount you’ll be able to borrow will vary based on your credit history as well.

Can I get a signature loan with bad credit?

The credit score needed for a good interest rate is often in the 600 – 700 range. 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 the dip in credit score is temporary.

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 to go in this direction, be sure your credit is healthy and that you have the income to make your monthly payments. Remember that a signature loan is a short-term financial solution and that it’s only wise to apply for this loan option if it’s suitable for your situation.