September 30, 2023


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What Is A Signature Loan? – Forbes Advisor

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If you need to borrow money, you might be weighing whether a signature loan is worth it. Signature loans are also known as unsecured personal loans, which means that while you’re not at risk of losing any collateral if you don’t pay (at least not immediately), you also need to qualify based primarily on your credit score and financial profile.

A signature loan might be a good option if your credit is good, you want a quick and easy application process and you don’t want to (or can’t) put up collateral. Here’s what else you should know before you hit the “apply” button on a signature loan.

How Signature Loans Work

Loans generally come in two types: secured and unsecured. Secured loans get their name because they’re “secured” by some sort of collateral—i.e., something of value that you pledge, like a car or a savings account, that the lender can repossess if you don’t pay.

Unsecured loans don’t have any collateral per se. They’re “secured” by nothing other than your signature on the loan agreement, hence their alternate name, signature loans.

After you sign your name on the dotted line, your lender will give you the entire lump sum in a single payment, either by a deposit into your account or by writing you a check. Signature loans limits can vary drastically, from several hundred to several thousand dollars.

You’ll then make steady, even payments each month until the loan is paid off. Signature loans generally last from one to seven years, although three- or five-year term lengths are most common.

Signature Loan Costs

Signature personal loans come with a few costs, some of which you may pay upfront, while others are included in your monthly loan payments.

Interest Rate

For most loans, the biggest cost is interest. Your total loan cost is reflected in your annual percentage rate (APR). When you send the money in each month, it’ll be split up into a “principal” portion that goes toward paying down the loan balance, and an “interest” portion that goes to the lender.

The smaller your interest rate, the less you’ll pay to the lender with each payment. More money will also go toward paying down the loan, so this is why it’s so important to focus on the signature loan interest rate.

Origination Fees

Another big cost is an origination fee. Not all signature loans charge them, but if your credit is poor or you’re taking out a very large amount of money, it’s more common. This fee is taken out of your loan proceeds as a percentage.

For example, if you apply for a $10,000 loan with a 3{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} origination fee, you’ll only actually get $9,700 from the lender because the origination fee is $300. This is important to take into account when calculating how much you need to borrow.

Other Miscellaneous Fees

Most lenders will charge a late fee if you make a payment past the due date. They may also have certain other fees, such as for rolling your current loan into a new loan if you can’t afford it.

You may also see “prepayment penalties” mentioned to pay your loan off early on other sites. However, prepayment penalties are usually rare or nonexistent with reputable lenders.

Is a Signature Loan Right For Me?

Signature loans are good for when you want a simple, quick loan to apply for without too much hassle. Since lenders don’t require collateral, it’s often just a matter of checking your credit and your financial details to make a decision. Many signature loan lenders even offer same-day approvals, and possibly even same-day funding if you apply early enough in the day. You pay for this with a higher cost, however.

Even if your credit score is good, you often can still get a lower interest rate by applying for a secured loan instead with collateral, if you have it. If your credit score is good, though, the cost of a signature loan might not be that much higher than with a secured loan.

Signature loans are also a good choice when you want a steady, predictable payment in your budget. You know exactly when a signature loan will be paid off, because it’s in the loan agreement. Unlike a credit card or a line of credit, there’s no temptation to keep racking up a balance over time because you get all of the money upfront.

Where to Find Signature Loans

You can find signature loans, or unsecured personal loans, from:

  • Online lenders. It’s usually a quick process to shop around and apply for online signature loans. These businesses are often heavily automated, with no need to go into a physical location.
  • Banks and credit unions. Depending on the policies, you may also be able to apply for a signature loan entirely online or you may have to go into a branch. Credit unions often have cheaper rates than banks, although you’ll need to meet certain requirements to qualify for membership before you can apply for an account.
  • Payday lenders. Since payday loans aren’t backed by collateral, they technically qualify as a signature loan. However, we don’t recommend them because they’re extremely expensive, they don’t help you build your credit and they often employ shady business practices.

5 Steps to Get a Signature Loan

Signature loans are actually one of the easiest types of loans to apply for. Here are the steps you should take.

  1. Shop around: Check your rates with as many lenders as possible. The more lenders you check with, the better your chances of finding the best loan. Make sure each lender only does a soft credit pull first so that your credit isn’t affected.
  2. Choose a lender: Based on your rate shopping, pick the best lender. You’ll typically be able to complete your application online, but some lenders require you to call.
  3. Provide documents: Most lenders will require extra documents from you, such as your past tax returns, pay stubs, bank account statements and copies of your driver’s license. You can speed up your loan application by providing these as quickly as possible.
  4. Sign the signature loan agreement: If you’re approved, it’s time to put the “signature” on “signature loan.” Make sure you read the agreement carefully so you know exactly what you’re signing up for.
  5. Sign up for auto pay: You’re more likely to miss a payment if you have to do it manually each month. You can remove that worry from your list entirely if you sign up for auto pay.

Are There Signature Loans for Bad Credit?

Yes. It’s possible to get signature loans for bad credit, but one of two scenarios might happen:

You’ll Pay a Much Higher Interest Rate

Signature loans already tend to be more expensive than their secured loan counterparts. That’s especially true if you have bad credit. If you qualify for a signature loan for bad credit, the rates you’ll pay are similar to or even higher than those of credit cards, in the double-digit range.

You May Need a Co-signer

Some lenders allow for co-signers, which are people who agree to have backup responsibility to make payments if you don’t. If you have a friend or family member who trusts you and who has good credit themselves, you can consider asking them to co-sign on the loan for you in order to be approved.

It’s especially important to make sure you pay on time in this case because if you don’t, not only will your cosigner be on the hook for the money, they’ll also receive a hit to their credit score. The last thing you want in addition to a bad financial and credit mark is a broken relationship. But if you pay on time, a co-signed signature loan can be a good way to boost your credit score and get the money you need.