Written by: Erica Sandberg
Edited by: Lillian Guevara-Castro
Reviewed by: Mike Senecal
If you’ve been exploring loan options recently, you may have come across several loan terms whose definitions aren’t immediately obvious. This has happened to me — and if you’re like me and find yourself asking questions like, “What is a signature loan?” read on for more information.
Is it possible to borrow money from a reputable financial institution with nothing but your good name? Yes, and it’s called a signature loan. Many lenders offer them, and the money can be used for all kinds of things that you want and need. No collateral is required and once approved, the funds will be at your disposal.
However, as with all credit products, you must understand how they work before applying. Here’s what you need to know about signature loans, from their features to how to manage one correctly.
A Signature Loan is a Type of Unsecured Personal Loan
Signature loans fall under the overarching term of “personal loans.” The funds are not typical for business use but for other expenses you’d like to finance. The most common uses for signature loans include medical procedures, home improvements, car repairs, and consolidating high interest debt.
Unsecured signature loans are granted on good faith, which is your personal guarantee that you will satisfy the debt according to the expectations outlined in the agreement.
The arrangement goes beyond a handshake, though. You have to sign a contract. When you do, you’re legally bound to the terms you’ve accepted, such as the:
- Loan amount
- Number of months or years you have to repay
- Payment amount
- Monthly due date
- Interest rate
- Potential penalties and fees for not paying as agreed
Since signature loans are unsecured, you may wonder if there are also those that are secured. The answer is no, but there are plenty of secured personal loans. You will offer collateral, such as property or money in an investment account, to guarantee the loan. If you fail to pay, the lender can claim the assets.
As opposed to credit cards, which are open-end products (the balance and payment fluctuate with activity, and there is no fixed date for repayment), signature loans are closed-end. That means that payments are set so that you’ll repay the loan by a specific date, and you can’t add to the balance.
Signature student loans, which, as the name suggests, are designed to help college students pay for education expenses, are also available to qualifying applicants.
They’re unsecured loans backed by the federal government. Unlike federally guaranteed student loans (see table), which are not contingent on an applicant’s credit history, though, the lender will check your credit score to see if you qualify.
| Academic Year (begins in July) | Direct Subsidized Loans (Undergrad) | Direct Unsubsidized Loans (Undergrad) | Direct PLUS Loans (Graduate) |
|---|---|---|---|
| 2019-20 | 4.53% | 4.53% | 7.08% |
| 2020-21 | 2.75% | 2.75% | 5.30% |
| 2021-22 | 3.73% | 3.73% | 6.28% |
| 2022-23 | 4.99% | 4.99% | 7.54% |
| 2023-24 | 5.50% | 5.50% | 8.05% |
If your scores are too low to qualify on your own, you can get a cosigner who has good credit to help. Most programs let the cosigner drop off the contract after you’ve made 24 months of on-time payments.
Where Can I Get a Signature Loan?
Many lenders, including banks, credit unions, and alternative financial institutions offer signature loans. Don’t apply all over town hoping for an approval, however, as it will lower your credit scores with a slew of unnecessary credit inquiries.
Sallie Mae is a common provider of student signature loans. Those loan amounts can exceed $100,000.
What is the Interest Rate on a Signature Loan?
All signature loans charge an interest rate and it is extremely important to check what the rate is before agreeing to the loan. You will want the rate to be as low as possible.
In general, the higher your credit scores, the lower the interest rate will be. Signature loans available to people with great credit can offer interest rates in the single digits. In contrast, the rates for bad credit loans can be as high as 35.99%.
The amount you pay in finance fees differs greatly based on the interest rate. For example, if you take out a three-year, $5,000 loan with a 5.99% interest rate, the accumulated interest would be approximately $475.
A loan of the same amount and payment term with a 22% interest rate will cost you about $1,874. That’s a major difference.
What Credit Score is Needed for a Signature Loan?
After you apply, the lender will review your credit score to determine whether you qualify. FICO and VantageScore are the two most common scoring models and they both range from 300 to 850.
A good FICO credit score is considered to be above 670.
If you have high scores, as well as a reliable income that provides you with enough money left over after paying expenses to handle the loan’s payment, you should be eligible for a wide variety of signature loans.
Fewer signature loans are available to people with very low scores — below 600 — but some lenders do cater to the subprime market.
Can You Get a Signature Loan with Bad Credit?
As with all credit products, the better your credit rating, the easier it will be to qualify, but signature loans are available to people with bad credit. It just means your options will be limited, and the amount you can borrow will be less than if you had a great credit score.
If your credit scores are low, the lender will be looking closely at the amount of money you have coming in on a monthly basis, whether it’s from a job or other guaranteed sources such as SSI benefits. Income types a lender will consider may include:
- Regular paychecks from an employer
- Pension payments
- VA benefits
- Disability payments
- Unemployment compensation
- Alimony
- Seasonal or part-time pay
All sources will need to be documented as taxable income to qualify, and the amount has to be sufficient for you to easily meet the loan payment.
How Does a Signature Loan Compare to a Line of Credit?
When you take out a signature loan, the interest is built into the payments, so a portion of what you pay will go toward financing. You will always know how much you have to pay each month, too, since the payments are fixed.
You can always pay more but never less. The balance will decline over time (terms usually range from 12 months to five years), and eventually, it will be satisfied.
On the other hand, a line of credit is a product where you draw from an amount that the lender makes available to you. If you don’t use the money, no interest will be charged.
When you do borrow from the line of credit, interest will start to accrue and you’ll have to make at least the minimum payments. These lines of credit have draw periods, which is the length of time you can tap into the funds. When that draw period ends, you have to pay the loan back within a fixed time frame.
Compare Loan Offers Before Agreeing to the Terms
Be sure to review multiple signature loan offers before making your final decision. The terms need to be right for you. Outside of the lowest possible interest rate, the monthly payment shouldn’t cause any financial stress. That means examining your budget to ensure you have enough cash left over every month to easily send the payment.
In addition to the benefit of paying for something over time, when you take out a signature loan and manage it correctly, your credit scores should increase. All you have to do is send your payments by the due date — on-time payments account for 35% of your FICO Score.
After the loan is zeroed out, your credit report will indicate that you can handle this type of credit product perfectly — which is what all lenders want to see.
