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What is a signature loan?

Use your signature as personal loan collateral

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Signature loans are a type of unsecured personal loan that can give you access to cash that can be used for a variety of purposes. They are called signature loans because lenders approve your application based on your creditworthiness and your signed agreement to repay the loan plus interest within the repayment period.

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.


Key insights:

  • A signature loan is a type of unsecured personal loan that requires good credit and income verification for approval.
  • You can use signature loans for almost anything, including vacations or recreational vehicle purchases.
  • A signature loan can boost your credit score if you use it for credit card debt consolidation.

What is a signature loan and how do they work?

A signature loan is an unsecured personal loan the borrower can use for nearly any purpose. However, some lenders may have usage restrictions, and many will not allow loans to be used for down payments or investing. People often use signature loans to pay for vacations, consolidate debt, fund education or make home improvements.

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

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.

Signature loans require you to pay back the amount you borrow over time plus interest. 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.

Expect to be charged fees, such as an origination fee, which typically come out of the funds you receive. Lenders 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 need to grant permission for a hard credit check.

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

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

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 stubs
  • 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.

The next steps after loan approval

If your application is approved, you'll receive documents to sign to start delivery of the funds. Before accepting the loan, make sure you do the following:

  • Read the fine print for additional fees.
  • Check your annual percentage rate (APR), monthly payment and information about the first payment.
  • Get your bank account routing and account numbers ready for the fund transfer.

You can change your mind about the loan anytime before signing the final approval.

Pros and cons of a signature loan

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 interest and fees for those with bad credit
  • Typically have short loan terms (six months to five years)
  • Harmful effect if you don’t make on-time payments

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    FAQ

    Can I apply for a signature loan online?

    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 record of making 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 don’t have a bank account, you may still be able to get approved for a signature loan, depending on the lender's requirements.

    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

    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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