What Are Signature Loans?

When money’s tight, a loan can help you afford necessary expenses in the short term. However, you may not be able to put up any collateral, like a vehicle or house, for a secured loan. Signature loans allow you to borrow money without collateral.

Because signature loans don’t require collateral, they tend to be tougher to qualify for, and they often have higher annual percentage rates (a loan’s interest rate plus fees). Because of this, getting a signature loan isn’t always the best financial move. Continue reading to learn what a signature loan is, how it works, and when to consider applying for one.

How does a signature loan work?

A signature loan is a type of loan that doesn’t require collateral — like a house, car, or investment — to secure it. Instead, your signature acts as a promise to repay the loan. Signature loans are somewhat common in the U.S. — according to TransUnion’s Credit Industry Insights Report, more than 22 million consumers had one at the end of 2022. 

Because you don’t need to put up collateral to qualify for a signature loan, your credit history, income and debt-to-income ratio (DTI) will impact your ability to secure one. You generally need a good credit score — typically a FICO score of 670 or higher — and a DTI of under 36% in order to qualify for a signature loan, though some lenders offer personal loans for bad credit.

Signature loan rates, terms, and loan amounts vary by lender. They tend to have higher APRs than secured loans — typical rates range from around 8% to 36%. Terms generally range from two to seven years, and maximum loan amounts range from around $40,000 to $100,000.

You can use a signature loan for almost any expense, like emergencies, a wedding, or even debt consolidation. After qualifying for the loan, you’ll receive the loan amount in a lump sum. Then you’ll repay the loan — with interest — in equal monthly payments throughout the loan’s term.

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Signature loan vs. a personal loan

Signature loans aren’t different from personal loans. Instead, signature loans are a type of personal loan. There are two types of personal loans: secured, or collateral loans — which require you to put up collateral — and unsecured loans. Unsecured personal loans are the same thing as signature loans, and they only require your signature.

Pros and cons of a signature loan

Be sure to weigh the benefits and drawbacks of a signature loan before deciding to apply for one:

Pros

• Less risk: You don’t need to put up collateral to qualify for a signature loan.
• Versatility: You can use a signature loan for a variety of purposes.
• Could help your credit: Paying off a signature loan on time can help boost your credit score.
• Save money: A signature loan with a low APR may help you save money or improve your financial situation — especially if used for consolidating high-interest debt.

Cons

• Higher rates: Signature loans usually have higher APRs than secured loans.
• Harder to qualify: If you don’t have good credit, you may not be able to qualify for an affordable signature loan.
• Could hurt your credit: Missing a payment on your signature loan could negatively impact your credit score.
• Fees: Signature loans, like any loans, usually come with a variety of fees.

When should you consider one?

You can use a signature loan for a variety of purposes, including:

• Debt consolidation
• Emergency expenses
• Medical bills
• Home repairs
• Weddings
• Vacations 

However, getting a signature loan isn’t always the best idea. Generally, you should get a signature loan only when doing so can help put you in a better financial position. For example, consolidating your debt with a lower-rate signature loan can help you save on interest.

You likely need good credit in order to qualify for a signature loan with a decent rate. If you have good credit, however, taking out a signature loan — as opposed to a secured loan — can give you peace of mind that if you were to default on the loan, you wouldn’t lose any collateral.

Finally, some emergency situations may warrant a signature loan, especially if you need an emergency loan fast.

How to apply for a signature loan

Applying for a signature loan is similar to applying for any other type of loan. If you’re interested in applying for a signature loan, take the following steps:

1. Compare lenders and choose a loan: Compare lenders based on APRs, loan amounts, term options, fees, and funding times. If a lender allows you to prequalify, doing so can help you get a better idea of the loan rates and terms you can qualify for, and it only requires a soft credit pull. Prequalifying for multiple loans will make it easier for you to select the best loan for you. Prequalification is not an offer of credit, however, and your final rate could be higher.
2. Fill out an application and submit the necessary materials: Most lenders will allow you to apply for a loan online. You’ll need to provide personal and financial information, including your Social Security number, proof of employment or income, and address. At this stage, the lender will also perform a hard credit check, which can knock your score by a few points.
3. Wait for approval and sign the loan agreement:The lender will review your application materials and credit history to determine if you qualify for the loan. If you qualify, they’ll send over the loan agreement for you to sign. After that, you’ll receive funding in as little as a day, depending on the lender.

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FAQ

Where can I get a signature loan?

You can get a signature loan at many banks, credit unions, and online lending companies. Online lenders are a good option if you’re looking for fast funding. If you already have an account with a bank, you may qualify for loan discounts or other perks. Generally, credit unions offer more affordable loans compared to banks. Just note you have to be a member in order to take out a loan at a credit union.

Can I get a signature loan with bad credit?

You may be able to get a signature loan with bad credit. There are certain lenders who offer loans for bad credit — they may just come with higher APRs. Avoid signature loans that don’t require a credit check, though. Lenders who offer these know they’re taking on extra risk, and they compensate with extremely high APRs. Finally, if you’re having trouble qualifying, you can always get someone to cosign a loan with you. Keep in mind that a cosigner will be responsible for making payments if you default.

How long does it take to get approved for a signature loan?

It depends on the lender. Typically, getting approved takes anywhere from one day to one week. Some lenders can even approve your application the same day you submit it, as long as your application isn’t missing any information. After approval, funding time can be a matter of hours up to a week. Typically, online lenders offer the fastest funding.

Can I prepay a signature loan without any penalties?

Prepayment penalties vary by lender, so they’re something to consider before choosing a loan. Some lenders charge prepayment penalties, meaning you’ll be penalized for paying off your loan before the term ends. Other lenders don’t have any prepayment penalties. Check a loan’s terms and disclosures to learn about any prepayment penalties before signing your loan agreement.

Are there any alternatives to signature loans?

There are several alternatives to signature loans. If you can’t get a good rate on a signature loan, a secured loan — like a home equity loan or vehicle loan — may be more affordable. If you’re a member of a credit union, you could consider a payday alternative loan. Credit unions offer these short-term loans in amounts up to $1,000, and they generally have more affordable rates than payday loans. Other alternatives include credit cards, peer-to-peer loans, and 401(k) loans.

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