If you’re looking to take out a loan and don’t want to put up collateral, such as a house or car, a signature loan might be a suitable option. But what is a signature loan, and how does it work? Here’s the signature loan definition: a type of unsecured loan that allows you to receive a sum of money by providing your income information, credit history, and signature.
In this article, we’ll go into detail on how signature loans work, what they can be used for, how to apply, and their pros and cons.
Here’s an overview of what will be covered:
- How does a signature loan work?
- How much can you borrow with a signature loan?
- What’s the difference between a signature loan and a personal loan?
- What are signature loans used for?
- Pros and cons of a signature loan
- Where can you get a signature loan?
- How to get a signature loan
- Alternatives to signature loans
- Signature loans: FAQs
- The bottom line
How does a signature loan work?
In order to be approved for a signature loan, you’ll need to meet the income and credit thresholds that the lender sets. The interest rate you receive will depend on your income and credit score. The greater your income and credit score, the more likely you are to receive a favorable interest rate.
If you’re approved for a loan and accept the offer, you’ll be given a sum of money soon after signing your loan agreement. This money can typically be used for a wide variety of purposes, including emergency expenses, debt consolidation, or home improvement. The repayment time frame for a signature loan can be anywhere from a few months up to five years—but generally, signature loans have a short repayment schedule.
How much can you borrow with a signature loan?
Lenders use your credit history and income to calculate how much money they will lend you. Because signature loans are “unsecured loans” and don’t require any collateral from the borrower, it makes them a riskier loan type for lenders than secured loans. As a result, signature loan amounts tend to be smaller than loans where collateral is used.
What’s the difference between a signature loan and a personal loan?
A personal loan is a sum of money that’s borrowed from a bank or lender and then paid back in installments over the course of months or years. Personal loans can be either secured or unsecured.
A signature loan is a type of personal loan and has a few specific characteristics: It’s an unsecured personal loan that usually requires a higher credit score for approval than a secured loan. As a result, it’s more difficult to be approved specifically for a signature loan than it is to be approved for the broader category of a personal loan.
What are signature loans used for?
Part of the appeal of signature loans is their flexibility. They’re helpful in various situations since they can be used to pay for a number of different types of expenses. Let’s look at some common reasons to get a signature loan.
Emergencies
Unexpected expenses are an unavoidable part of life. A signature loan can be used to cover emergency repairs to a home or car, or to pay for surprise medical bills. Getting emergency money through a signature loan allows you to pay for these issues right away, and then repay the money slowly over time.
Life events
Significant life events—like a wedding or relocation to a new home—can be accompanied by a temporary increase in spending. A signature loan can provide the extra money necessary to make this sort of big life change possible. However, it’s important to be cautious and map out a budget that will allow you to also pay the loan back on time.
Debt consolidation
If you currently have high interest loans or significant credit card debt, a signature loan can be a productive way to consolidate your debt and also pay less in total interest.
Major purchases
Large expenses like furniture, appliances, or electronics can be easier to manage with a signature loan. You can make the purchase now and pay it back over time instead of saving up for months.
Home improvements
Fixing your roof, updating your kitchen, or adding a deck can improve your home’s value. A signature loan gives you the money up front to make these changes without waiting.
Pros and cons of a signature loan
While a signature loan can be beneficial in many situations, they come with their pros and cons. Consider these benefits and drawbacks before you make a decision:
Pros of signature loans
- You don’t need to put up any collateral. If you don’t have assets like a house or car—or simply don’t want to use them as collateral—you won’t be required to with a signature loan.
- Fast source of funds. Within as little as 24 hours, you can have access to the money you need.
- Lower rate of interest than most credit cards. Rather than putting a significant purchase on a credit card, you may ultimately be able to save money by using a signature loan to pay for it instead.
- Flexibility. You can use the money for almost any purpose, giving you freedom to handle different financial needs.
Cons of signature loans
- High interest rates. If you have poor credit, a signature loan may not be a great choice as it could be offered at a high rate of interest.
- Fees. While terms vary by lender, some charge fees, such as origination fees, late fees, or prepayment fees.
- Credit score damage. If you fail to make timely payments on your signature loan, it will have a negative effect on your credit score.
Where can you get a signature loan?
You have several options when looking for a signature loan. Each type of lender has different benefits and requirements. You can get a signature loan from:
- Online lenders. Online lenders often have quick approval times and may offer competitive rates. Many let you check your rate without hurting your credit score. The application process is usually simple and can be done from home.
- Traditional banks. Your local bank may offer signature loans to existing customers. Banks often have strict credit requirements but may give better rates to people they already know. You can speak with someone in person about your options.
- Credit unions. Credit union loans often offer lower rates than those from banks. They may be more willing to work with people who have fair credit. You need to be a member to get a loan, but joining is usually easy.
How to get a signature loan
If you’re a suitable loan candidate, the steps for getting a signature loan are usually straightforward. By being prepared ahead of time, you’ll help to ensure a smooth and speedy application process. Follow these steps to get a signature loan:
Step 1: Understand your credit score
Your credit score is one of the primary pieces of information used to determine whether you should be approved for a signature loan. So, it’s important to review your credit score and credit report before applying for a loan. You’ll want to make sure that your score is high enough for consideration, and also check for any credit errors.
Step 2: Ensure you meet the requirements
Before applying, check that you meet the basic signature loan requirements. Most lenders want to see a credit score of at least 580, though some may require 650 or higher. You’ll also need a steady income and a low debt-to-income ratio. Requirements for signature loan approval vary by lender, so shop around to find one that fits your situation.
Step 3: Collect all important information
Information about your income factors heavily into signature loan approval. Make sure that you have pay stubs and W-2 forms on-hand, as you’ll likely be asked for these documents in order to confirm your employment status and income. It’s also a good idea to have documentation that shows whether you rent or own your home, and what your monthly cost of housing is.
Step 4: Assess your loan options
Applying with multiple lenders allows you to compare loan terms and choose the one that fits your situation. However, applying for a loan can result in a hard inquiry on your credit, which will impact your credit score. So, if you plan on applying for a loan with several lenders, it’s best to complete all applications within a few weeks. That way, the hard inquiries will be treated as a single inquiry.
Step 5: Double-check and sign loan
Before you sign a loan agreement, be sure to scan the document closely and ask any last minute questions you might have. It’s a good idea to re-read all the fine print. Prepayment penalties, origination fees, late payment fees, and automatic withdrawals all have the potential to affect how much you pay over the course of your loan. If you see any of these terms present in the agreement and haven’t already discussed their impact with your lender, it’s a good idea to do so before signing.
Step 6: Accept loan and start repayments
Once you have signed your signature loan agreement, you can receive funding in your account as soon as the same day. To get started on the right foot, make a note of the first repayment date. For extra peace of mind, consider setting up automatic payments.
Alternatives to signature loans
If a signature loan doesn’t seem right for you, there are other ways to get the money you need. Each option has different benefits and drawbacks to consider. A few popular alternatives to signature loans are:
Home equity loans
If you own a home, you might be able to borrow against its value. These loans often have lower interest rates because your home serves as collateral. However, you risk losing your home if you can’t make payments.
Credit cards
Credit cards give you fast access to money and may offer rewards or cash back. They’re good for smaller purchases or short-term needs. However, interest rates are usually higher than those on signature loans, especially if you carry a balance.
Peer-to-peer lending
These platforms connect you directly with individual investors who fund your loan. You might get approved even with fair credit, and the process is often faster than traditional banks.
Payday loans
Payday loans give you money quickly but come with very high fees and interest rates. They’re meant to be paid back within weeks, not months. Most financial experts recommend avoiding payday loans except in true emergencies.
Secured personal loans
With a secured loan, you put up collateral like a car or savings account. This makes it easier to get approved and may lower your interest rate. However, with secured personal loans, you risk losing whatever you use as collateral if you can’t repay the loan.
Signature loans: FAQs
Is it hard to get approved for a signature loan?
Getting approved depends mainly on your credit score and income. Most lenders want a credit score of at least 580, steady income, and low debt compared to your earnings. If you meet these basic requirements, approval is usually straightforward.
How long do you have to pay back a signature loan?
Most signature loans have repayment terms between two and five years. Some lenders offer shorter terms of 12 to 24 months, while others may extend up to seven years.
Can you get a signature loan with bad credit?
Getting a signature loan with bad credit is difficult since these loans rely heavily on creditworthiness. If your score is below 580, you might need to consider other types of personal loans or work on improving your credit first. You may still qualify for a loan, but a lower credit score typically means you’ll end up with a higher interest rate.
The bottom line
A signature loan requires only your signature and good credit to get approved. These loans offer quick funding without collateral and can be used for emergencies, debt consolidation, major purchases, or home improvements. Before applying, shop around with different lenders to compare rates and terms. At Sun Loan, we’re proud to offer a wide range of personal loans, including signature loans. It’s our mission to provide you with a loan that meets your needs and budget. Learn more about our loan options here.
