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What is a signature loan?

Use your signature as personal loan collateral

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Written by Rachel Morey
Edited by Cassidy McCants

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    woman signing loan paperwork

    While many loans require you to provide collateral such as a home or vehicle, others don’t require material collateral. Signature loans, for instance, are unsecured personal loans that give you access to a lump sum of money as long as you have the required credit score, provide information about your income and sign the contract.

    Of course, lenders set requirements, so potential borrowers with credit challenges or those with low income may have a hard time getting approved for a signature loan. You can typically find a low-interest signature loan if you have a steady income and good credit, however.

    How does a signature loan work?

    A signature loan is an unsecured personal loan the borrower can use for nearly any purpose (subject to lender restrictions). People often use signature loans to pay for vacations, consolidate debt, fund education or make home improvements.

    You can get a signature loan from pretty much any bank or credit union. There are also several reputable online lenders that provide signature loans. Once approved, you can electronically sign the required documents and receive the funds in your bank account within a few hours up to a few days, depending on the lender.

    Terms on signature loans last from a few months to a few years.

    Signature loans require you to pay back the amount you borrow over time plus interest. Lenders typically set interest rates based on the risk of default. Your credit score, history with the lender, income and other debts may help a lender decide whether to approve your application and how much interest to charge.

    These lenders typically charge fees, such as origination fees, which typically come out of the funds you receive, so it's important to understand these charges before you agree to accept the funds. They may also impose prepayment penalties, which help ensure they receive a certain amount of interest even if you choose to pay off the loan early.

    Signature loan terms can range from a few months to a few years. You may pay a slightly lower interest rate if you choose a loan with a shorter term. Some lenders let you choose your loan term length and repayment schedule.

    How to get a signature loan

    Getting a signature loan starts with an application. Many lenders provide online applications with just a few general questions about your identity and financial situation. You may be able to get preapproved for a signature loan with only a soft credit pull, but if you accept the loan terms and want to move forward, you'll grant the lender access to your full credit reports (hard credit pull) and credit score.

    When a lender pulls your credit to provide final approval for a signature loan, the action will show on your credit report as an inquiry. It’s important to note that new credit inquiries could reduce your credit score temporarily by a few points.

    Here's some of the information a lender may require in a signature loan application:

    • Your full legal name
    • Your driver's license number
    • Your Social Security number
    • Your mailing address
    • The name and address of your employer
    • Your most recent pay stub
    • Your most recent tax returns

    If your application is denied, you have a right to know the specific reason. You’re also entitled to free copies of the credit reports the lender used to justify their denial.

    If your application is denied, the lender must provide written communication that explains their decision."

    If your application is approved, you'll receive documents to sign to start delivery of the funds. You may be required to provide your bank account routing and account numbers. Remember, though: Even if you’re approved, you aren't required to accept the loan. Read the fine print to look for any additional fees. Check the loan disclosure page for your annual percentage rate (APR), repayment schedule and information about the first payment.

    If you decide to accept the loan, you can sign the paperwork and receive the funds in a single payment. If possible, it’s smart to set up auto payments so you don't accidentally make a late payment. If the lender reports to Experian, TransUnion or Equifax, making every payment on time can help you build good credit over the course of the loan.

    Pros and cons

    For borrowers with good credit, signature loans can provide several benefits, including lower interest rates and zero or low fees. A signature loan doesn't require collateral, which is a major plus for many borrowers.

    If you have bad credit or haven't had a lot of experience with loans or credit cards, you may have trouble getting a signature loan with good terms and a low interest rate, though.

    Pros

    • Fast and convenient
    • Low cost for those with good credit
    • No collateral required
    • Funds can be used for most purposes

    Cons

    • High fees for credit-challenged borrowers
    • High interest for those with bad credit
    • Typically short loan terms (six months to five years)

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      FAQ

      Can I get a loan from a credit union with bad credit?

      Maybe. Many credit unions provide low-interest loans to members with low credit scores. Financial institutions may not advertise these loans, so if you have a low credit score or no credit profile, talk with a representative to learn about your options before you turn to online lenders.

      Some credit unions will accept a borrower with bad credit if they have a co-signer, but proceed with caution if you’re considering this option. A co-signer is legally responsible for the debt, just like the borrower. If you fail to make on-time payments, you could ruin your co-signer's credit. Plus, if you default on the loan, the lender will come after the co-signer for payment.

      Can I apply for a signature loan online?

      Yes. Depending on your lender's requirements, you may be able to complete the entire loan application process online.

      Does a personal loan show up on credit reports?

      A signature loan shows up on your credit report if the lender chooses to report activity to the credit bureaus. This type of loan could hurt or help your credit score, depending on a number of factors, including your ability to make payments on time.

      Can I get a signature loan without a bank account?

      While it's possible to get a signature loan without a bank account, having one makes receiving funds much easier. Even if you know you can't get a bank account, you may still be able to get approved for a signature loan, depending on the lender's requirements.

      Be aware that bad-credit signature loans may charge interest rates as high as your state's limits. In some areas, borrowers with credit challenges pay 30% APR or higher.

      If you are able to get a bank account, it may be worth the effort to have easier and faster access to your loan funds.

      Bottom line: Is it a good idea to get a signature loan?

      For some borrowers, a signature loan can be a powerful tool to help propel them toward their financial goals. For others, it can make a bigger mess out of a problematic money situation.

      If you need quick access to cash and have the credit and income to qualify for a signature loan with a low interest rate, it could be a good option. However, it's important to shop around for the best possible rates and fees.

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