Life brings most of us occasions when a little extra money would be helpful. Maybe you’ve been hit with unexpected medical bills, or your home’s air conditioning unit literally gave its last gasp. Or maybe you’re planning a wedding and need to put a deposit down to reserve the venue.
If you have good credit and a steady income, a signature loan could provide just what you need. A signature loan, also called a character loan or good faith loan, is a fixed-rate personal loan that uses your signature as collateral in place of property or other assets. It’s usually a short-term installment loan, and interest rates can tend toward the high side.
So how does a signature loan work and how can you get one? We’ll discuss all things signature loan so you can decide if getting one is right for you.
What Is a Signature Loan and How Does It Work?
A signature loan is a type of personal loan that gets its name from the fact that you don’t need collateral to get one – just a signature. Many lenders – banks, credit unions and online lenders – offer signature loans.
Because you don’t need collateral, a signature loan is classified as an unsecured loan. In fact, a signature loan and an unsecured personal loan are the same thing. Although collateral isn’t required, you will still need to meet certain requirements set by the lender (we will get to those in a bit).
In general, a signature loan has a fixed rate. That is, the interest rate is set when you take out the loan. The borrower makes monthly payments to repay the loan, much like any installment loan (also known as installment credit).
What Is a Signature Loan Used for?
Typical uses for a signature loan include debt consolidation, emergency expenses like medical bills, or home improvements. People also use signature loans for life events like having a baby or getting married. Here are some common examples:
Getting a signature loan to pay off higher-interest debt like credit card debt can be a perfect use of a signature loan. Let’s say a borrower owes $3,000 on credit cards, each with an annual percentage rate (APR) between 16% and 23%.
The borrower takes out a signature loan for $3,000 and pays off all the credit card debt, saving 9% in interest and avoiding late payment fees (as long as you make signature loan monthly payments on time and in full).
Keep in mind, though, that interest rates for personal loans can vary widely, from 5% to 36% depending on your credit. A personal loan with an interest rate higher than your other debt certainly won’t help you consolidate and pay off that debt.
Sometimes, costly emergencies come up unexpectedly. One can imagine a surprise medical bill from a hospital stay – such as from an unfortunate car accident or emergency surgery to correct an unforeseen condition. Taking out a signature loan can help a borrower pay those bills.
Major life events
You can use signature loans to fund happy occasions as well. Weddings can be a good use of a signature loan. Or with a baby on the way, a borrower can use a signature loan to purchase a crib, stroller and other items for the baby’s arrival.
What Are Approval Requirements for a Signature Loan?
Approval for a signature loan is based on your creditworthiness, debt and income. So, to get a signature loan, a lender typically requires your credit history, debt-to-income ratio (DTI) and income along with your signature.
But because a signature loan is unsecured, a lender’s requirements to get one may be a bit more stringent. You’ll typically need a DTI of 36% or less and a credit score of at least 660.
Can I get a signature loan with bad credit?
Some lenders offer unsecured personal loans available to help those with lower credit scores. Beware that signature loans for people with lower credit scores can carry very high interest rates, often between 25% and 35%.
How Much Can You Borrow on a Signature Loan?
The amount a borrower can take out with a signature loan depends on the lender and can range from $500 to $50,000. Typically amounts tend toward the lower end of that scale. The repayment period is usually between 12 and 60 months.
What Are Pros and Cons of Signature Loans?
As with many things in life, signature loans have advantages and disadvantages. Consider these pros and cons of a signature loan:
Typically, you can get approved for a signature loan anywhere from a day or two to a week.
For a signature loan, you won’t have to put up any assets as collateral.
If you have good credit and a steady income, you may get an interest rate lower than your credit card APR.
Fees will vary with the lender, but typical fees for a signature loan might include an application fee (around $25 – $50), an origination fee (1% – 6% of the loan amount), late payment fees and prepayment fees.
If you have bad credit, you may be looking at interest rates of 25% to 35%.
How Can You Get a Signature Loan?
Before contacting your bank, credit union or online lender, you may wish to know some specific numbers and have certain documentation in place. Here are some steps to getting a signature loan:
Check your credit report
Before hitting up a lender, you can check your credit report, which you can do for free, or just take a look at your credit score. If it isn’t what you want it to be, consider how to improve your credit. And if possible, wait until your credit score has increased before applying for the loan.
Organize your documents
Make sure you have everything ready, including social security number, two forms of identification and proof of income like tax returns, pay stubs and/or bank statements.
Research and compare options
Be sure to compare options for reputable banks, credit unions and online lenders to get the best terms and rates.
Zoom in and read the fine print
Make sure you understand all the terms, including your interest rate, repayment period and fees.
Begin repaying the loan
Paying back each monthly payment in full and on time will strengthen your credit score.
Avoid Collateral Damage With a Signature Loan
For those who need money quickly, a signature loan could fit the bill. But be sure to ask a trusted lender about other options as well so you’re sure to get the loan that’s best for your personal financial situation and needs.
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Experian™. “What is a Signature Loan?” Retrieved April, 2022 from https://www.experian.com/blogs/ask-experian/what-is-a-signature-loan/
Experian™. “What Is the Best Term Length for a Personal Loan?” Retrieved December 2021 from https://www.experian.com/blogs/ask-experian/what-is-the-best-term-length-for-a-personal-loan/