A signature loan is a type of personal loan that can help you get the cash you need without putting up collateral.
These loans are available from various lenders, and it helps to know how they work before you sign on the dotted line. Their convenience can benefit those with good credit or who lack the collateral for a secured loan, but interest rates can be high for borrowers with subpar credit.
[Read: Best Personal Loans.]
What Is a Signature Loan?
Signature loans are a type of personal loan available from banks, credit unions, online lenders and peer-to-peer lenders. The name “signature” doesn’t mean you can just sign and get the money, however. You’ll still need to complete a loan application, which could involve verifying your income, employment and current debts.
While your lender may limit how you can use the funds, a signature loan can generally be used for almost any purpose. From emergency expenses, home improvement projects and paying taxes to buying a boat or covering a vacation, a signature loan can be a powerful tool to help you achieve a broad range of goals. Whether it’s a good idea to use a loan depends on the expense and your situation.
Signature loans are for a fixed loan amount, monthly payment and repayment term. Your terms will depend on your credit history, and repayment terms generally range between one and five years.
But signature loans come with one caveat: Typically, they have higher interest rates than collateralized loans, such as home equity lines of credit or secured personal loans. However, signature loans can have lower rates than credit cards, especially if you have good credit.
Are Signature Loans and Personal Loans the Same?
Here’s the short answer: Signature loans are a type of personal loan, but not all personal loans are signature loans.
A signature loan is another name for an unsecured personal loan, where the approval factors are your credit and ability to repay. But personal loans can also be secured, meaning they are backed by collateral, such as a car, home or cash in a bank account. Secured personal loans lower a lender’s risk since it can take the collateral to make itself whole if you fail to repay your loan.
How Do You Get a Signature Loan?
1. Shop around. It might be a good idea to prequalify with multiple lenders before making a final decision on a lender.
2. Submit an application. Depending on the lender, you may be able to apply online, over the phone or in person.
Approval criteria will vary by lender, but the two major things a lender looks for on a signature loan application: your credit history and capacity — or your ability to repay a new debt with your existing cash flow, says Carma Peters, president and CEO of Michigan Legacy Credit Union.
If you’re applying with a bank or credit union where you’re already a customer, it could be easier to get approved. Since your financial institution can see things like your direct deposit history, Peters says steps like income and employment verification can be unnecessary.
3. Receive approval and funds. Once you’re approved, your funds will be disbursed in a lump sum. Your lender can share information on how quickly you can expect the funds in your bank account. Then, how you use the money is up to you.
[Read: Best Online Loans]
Where Do You Get a Signature Loan?
You can get a signature loan, or an unsecured personal loan, from banks, credit unions or online lenders.
Banks. Borrowers may find getting a loan through their bank is the best choice, as customers generally have a better chance of being approved and tend to receive interest-rate discounts or higher loan amounts than noncustomers. But expect to face strict income and credit score requirements.
Online lenders. Borrowers with less-than-stellar credit may have a good chance of scoring an unsecured personal loan through an online lender. The application process is a completely online experience, but so is most of the customer service. Because of that, if you prefer in-person assistance, an online lender might not be for you. Also, rates could be higher compared with a loan from a bank, but funding and approval can be quicker — sometimes as soon as the same day.
Credit unions. A signature loan from a credit union could be a good option, as interest rates may be lower and the terms may be more flexible than banks or online lenders. And credit unions typically approve loans for members with fair or bad credit. But you must be a credit union member to apply for a loan.
How Much Can You Borrow With a Signature Loan?
Several factors affect how much you can borrow for a signature loan, including your income, credit score and current debt. How much funding you receive varies by lender, but you can expect to borrow as much as $50,000 with a signature loan, according to Experian. This amount could even go as high as $100,000.
Compared with other types of loans, signature loan amounts will be a bit lower since there isn’t collateral to secure the loan should a borrower default on payments.
Are There Signature Loans for Bad Credit?
While interest rates on a signature loan might be higher for those with bad credit, approval isn’t impossible if your credit has some blemishes. In general, lenders view FICO scores below 670 as subprime. This includes the fair and poor FICO score ranges.
If you already bank with a credit union, you could find that your relationship means everything, even if your credit has some hiccups. At her credit union, Peters says there are highly loyal members who may not have the largest incomes or most spotless credit histories, but who still qualify as low-risk borrowers.
“We know these members are incredibly loyal and that they’ll pay us back because they do it all the time,” she says.
There are also online lenders that offer personal loans for those with bad credit or no credit. For example, Upstart, a peer-to-peer lender, works with borrowers who have credit scores as low as 300, or no credit scores at all.
Even if you can get a signature loan, you may pay more for it than a borrower with stronger credit. You may want to add a co-signer to your loan, if possible, or consider a secured personal loan instead.
[Read: Best Low-Interest Personal Loans]
Is a Signature Loan a Good Idea?
Whether you need to finance fertility treatments or consolidate debt, a signature loan could be among the borrowing options you consider. Because of this loan’s flexibility and easy application process, those with good credit may appreciate this type, says Brian Samelko, vice president of personal lending at PNC Bank.
You’ll generally get a lower rate with a secured personal loan than with a signature loan. However, personal loans are typically unsecured, and there are some situations where signature loans could be a good idea.
For example, consumers looking to consolidate credit card balances or other high-interest debt may be able to save money with a signature loan. Signature loans are also more affordable than some of the easiest loans to get, such as payday loans. Peters notes that credit unions are limited to a maximum annual percentage rate of 18% on loans regardless of term.
“If our borrowers don’t have collateral, we’ll look for collateral,” says Peters. But there are times when a borrower may not have an asset that can secure the loan, or the borrower plans to sell the asset that would be used as collateral. Peters says a signature loan can be a reasonable alternative in these cases.
If you’re considering a signature loan, be sure to read all of the lender’s terms and conditions. You may find that some charge origination fees, which can add to the total cost of your loan.
More from U.S. News
What Are Payday Alternative Loans?
How Long Does It Take to Get a Personal Loan?
Can I Borrow Money With a 500 Credit Score?
What Is a Signature Loan? originally appeared on usnews.com
Update 09/30/24: This story was previously published at an earlier date and has been updated with new information.
