A signature loan is a type of unsecured personal loan. Sometimes called a “good faith” or character loan, it gets its name from the fact that lenders only use the borrower’s signature and a promise of repayment as collateral for the loan.
Signature loans are different than secured loan options, like mortgages or auto loans, which require the use of an asset — a home or car, in these cases — as collateral. Borrowers generally need to pay off these loans in full within a particular term with fixed monthly payments. The terms vary from lender to lender and can range from anywhere between a few months to several years. Interest rates on signature loans also differ from lender to lender, and the interest rates are, in part, based on the credit score of the borrower. People with higher credit scores may be offered a lower interest rate, while those with poorer credit ratings may be offered higher rates.
What is a signature loan used for?
As a type of personal loan, signature loans are used for a variety of reasons:
- Debt consolidation: If you can secure a signature loan at a lower interest rate than you are being charged on your credit card debts or other loans, you may save money by consolidating your debt within one loan.
- Emergency or unexpected expenses: The speed at which borrowers can get a signature loan often makes it an ideal choice in the case of emergencies, medical or otherwise, that can strike unexpectedly.
- Major purchases and life events: Whether you can’t get an auto loan or you plan to start a big home repair project, signature loans can help defray the costs of major purchases you’re unable to pay for all at once. They can help cover the costs of an unforgettable wedding or vacation, too.
Advantages and disadvantages of signature loans
There are particular advantages to signature loans. As mentioned above, signature loans offer the convenience that comes with being able to be obtained quickly. Additionally, not having to put up any assets as collateral can be advantageous. While you should, of course, keep to the agreement of your loan as best as you can, in a scenario in which you cannot keep up with your signature loan payments, you do not need to worry about the potential loss of your house or car.
These loans are, however, not without their disadvantages. For people who do not have an established credit history and a good credit rating, signature loans can be more difficult to acquire. Additionally, borrowers with poor credit could have to pay much higher interest rates. And, even if you do have a good credit score, signature loans may carry higher interest rates than secured loans like a mortgage and other unsecured loans like student loans.
How to get a signature loan
Signature loans are offered at a wide range of banks and lending institutions.
You have the option to apply for a signature loan in person at a bank or online. When you apply, you may be asked to fill out a form with your personal information, including your employer and income, and possibly provide copies of W-2 forms, tax returns or bank statements. Additionally, your potential lender will run a credit check to determine whether or not you’re qualified to receive a loan and, if so, at what interest rate. Sometimes within just a few minutes the underwriting process can be completed and you can be on your way to using your new signature loan.