What Is a Signature Loan?

What is a signature loan and how does it work?

A signature loan gives you a lump sum that you repay in fixed installments, plus interest, over a set term. Because these are unsecured personal loans that aren’t backed by an asset like your home or car as collateral, lenders take on a higher risk. To balance this risk, they heavily rely on your credit score, credit history, income and debt-to-income (DTI) ratio to help decide whether to approve your application and how much interest to charge.

You’ll find signature loans offered at most banks and credit unions. 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 loan terms can range from a few months to a few years. Some lenders let you choose your loan term length and repayment schedule, and you may pay a slightly lower interest rate if you choose a loan with a shorter term. We reviewed current examples from credit unions showing terms such as 12, 36 and 72 months. 

Terms on signature loans last from a few months to a few years, depending on the lender and your credit profile.

“Agreeing to a shorter personal loan term often results in securing a lower interest rate because the lender will get their money back from you faster, which means you'll have less time to default,” said Leslie Tayne, the founder of Tayne Law Group in Melville, New York. “The lender can afford to reward you for the reduced risk.”

Expect to be charged fees, including an origination fee, which is usually deducted from the funds you receive. And, while many mainstream online lenders no longer charge prepayment penalties, some lenders still impose them to ensure they receive a certain amount of interest even if you pay the loan off early.

» MORE: Personal loan vs. credit card: which is better?

Common uses for signature loans

Signature loans are flexible and can be used for a wide range of personal expenses. Here are some of the most common ways borrowers use these types of loans:

• Debt consolidation: Pay off high-interest credit card debt with a single, lower-interest loan.
• Home improvements: Fund repairs, upgrades or renovations without tapping into home equity.
• Major purchases: Cover the cost of appliances, electronics or furniture.
• Medical expenses: Pay for procedures or bills not covered by insurance.
• Emergency expenses: Handle unexpected costs such as car repairs or urgent travel.
• Vacations and events: Finance weddings, family vacations or milestone celebrations.

Some lenders may still prohibit certain transactions, such as investing or using the funds for a down payment, so check the lender’s policy before applying.

How to get a signature loan

Getting a signature loan starts with an application. Many lenders offer online applications that ask a few basic questions about your identity, employment and financial situation. They might ask for documents that help verify your ability to repay.

If your application is denied, the lender must provide a written explanation with the reasons for the 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 you prequalify, the lender may show estimated rates and terms before performing a hard credit inquiry. If you move forward, the final approval step usually requires a full credit check, which can cause a small but temporary dip in your score.

If a lender denies your application, it must give you written notice of the main reasons for the decision, or tell you how to obtain them. You’re also entitled to free copies of any credit reports the lender used to justify its denial.

The next steps after loan approval

Once approved, you’ll review and sign the final loan documents to start the delivery of funds. Before you accept, make sure you do the following:

• Read the fine print for additional fees. If the lender deducts an origination fee, make sure the amount you borrow still covers the actual cost you’re trying to pay.
• Check your annual percentage rate (APR), monthly payment amount and exactly when the first payment is due.
• Get your bank account routing and account numbers ready for the fund transfer.

You can change your mind about the loan at any time before signing the final loan agreement.

» MORE: Best personal loans with a co-signer

Pros and cons of a signature loan

Signature loans can provide several benefits for borrowers with good credit, including lower interest rates and predictable monthly payments. A signature loan doesn't require collateral, which is a major plus for many borrowers who want to avoid risking their assets.

They can also be expensive for borrowers with weaker credit, since fees and APRs may be higher. And, like any installment loan, late payments can further damage your credit.

Signature loans vs. other loan options

Signature loans differ from other common types of loans in a few important ways. The right choice usually depends on how much you need, how quickly you want to repay it and whether you need ongoing access to the funds. Here's a breakdown to help you decide if a signature loan is the best fit:

• Signature loans vs. secured loans: Secured loans require collateral, such as a car or home, to back the loan. Signature loans do not. This means there’s less risk to your assets, but lenders may charge higher interest rates due to the increased risk.
• Signature loans vs. credit cards: Credit cards offer revolving credit and ongoing access to funds as you pay down your balance. Signature loans provide a one-time lump sum with fixed payments. If you want a set payoff date and a consistent repayment schedule, a signature loan might be a better choice.
• Signature loans vs. payday loans: Payday loans typically carry extremely high fees and have short repayment terms tied to your next paycheck. Signature loans, though still dependent on your credit, usually offer better terms, lower interest rates and more time to repay.
• Signature loans vs. personal lines of credit: A personal line of credit offers flexible borrowing up to a set limit, but the interest rate is typically variable. Signature loans offer a fixed interest rate and a predictable payment plan.

FAQ

Bottom line

A signature loan can be a good fit if you need fixed-rate, unsecured financing and you can qualify for a competitive APR. But it can also make a bigger mess of a problematic financial situation if you start to miss the fixed monthly payments.

Before you sign an agreement, it's important to shop around among multiple lenders to get the best possible rates and fees.