A signature loan is another name for an unsecured loan. With a signature loan, you don't need to offer collateral for the loan. In some cases, lenders will approve signature loans on the same day. That means you can use a signature loan to pay for large, unexpected expenses that exceed your emergency fund, for home improvements,s or to consolidate credit card debt with a lower interest rate. Read on to understand what is a signature loan and how to apply for one.
What Is A Signature Loan?
A signature loan's meaning is a type of unsecured personal loan. The unsecured nature of this loan and how it's based on the borrower's creditworthiness. Lenders look at a borrower's credit score, income, and loan repayment ability. Understanding how this works before applying is important, as it can affect your ability to secure a signature loan.
Signature loan amounts are usually up to $50,000 but can sometimes be as high as $100,000. Factors influencing how much you can get on a signature loan include credit score, credit history, income, work stability, savings, and investment accounts.
How Does A Signature Loan Work?
Like other unsecured loans, a signature loan doesn't require collateral like a house, car, or other valuable assets. You can use a signature loan for nearly anything, from emergency expenses to consolidating credit card debt, to cash infusion in a small business. With a personal signature loan, after application and approval, you'll receive a lump sum that is paid back in equal monthly amounts over the term of the loan.
These loans typically have lower interest rates than high-interest financial products. Repayment periods usually range from 24 to 72 months. Interest rates vary widely by lender and the borrower's profile, ranging from 4.6% to 35% or more.
Most lenders have minimum credit score requirements of around 640, but some lenders will approve borrowers with credit scores as low as 300. Of course, these loans will come with higher interest rates.
Signature loans can be a convenient solution when you need cash fast, but they are not without pros and cons.
Understanding Signature Loan Mechanics
With a signature loan, you'll need to pass through three simple steps:
- Apply: You'll need to fill out an application with personal information.
- Approval: The lender will consider the information provided, including credit score and income, to offer a loan approval amount and interest rate. This can happen quickly in many days.
- Disbursement: In many cases, this happens the same day, although it can take up to a week.
Keep in mind that you could be approved for a signature loan even with a low credit score, but interest rates are determined based on credit scores. A good credit history can lead to more favorable loan terms and significant savings on interest payments. In some cases, you may get prequalified to see rates and terms you can expect before applying.
Loan Amounts And Terms
Borrowers can typically access a range of loan amounts. You could request a signature loan for $1,000 to $50,000. For borrowers with a high credit score and high income, this amount could increase to even $100,000 in some cases.
Common repayment terms range from 12 to 72 months, giving you the flexibility to choose a loan that meets your budget and financial needs.
Benefits Of Signature Loans
The benefits of signature loans center on their accessibility, ease of application, and that they don't require collateral. Many borrowers can qualify for a signature loan, although borrowers with lower credit scores may face higher interest rates. With responsible repayment, taking a signature loan can lead to improved credit scores.
Is A Signature Loan Identical To A Personal Loan?
A personal loan is a broad term that can apply to various loan types, including secured and unsecured loans. A signature loan is a type of unsecured personal loan. The similarity is that both unsecured personal loans and unsecured signature loans are not backed by collateral.
Acquiring A Signature Loan: Step-By-Step Process
It's important to understand the process of applying for signature loans before applying to ensure you get the best options available.
Step 1: Research Lenders
Lenders can offer widely different interest rates, from 4.6% to 30% or more. Researching different lenders offering signature loans can help you find the best match for your situation. You can do online research, read reviews, and compare interest rates and terms before applying.
Step 2: Prequalification
Many lenders will allow you to apply for pre-qualification. The pre-qualification process usually only takes a few minutes. To assess your situation, lenders ask for basic personal and financial information, including full name, address, and social security number. Prequalification provides an idea of potential loan terms you can expect without affecting your credit score.
Step 3: Application
To apply for a signature loan, you'll need to fill out the application form, which will ask for full name, address, social security number, income, and savings. You will be asked for documentation like a valid, government-issued ID, income proof, and credit history.
Step 4: Approval
Once you've filled out the application, the lender will evaluate the application on factors such as credit score, credit history, income, and debt-to-income ratio. This takes 24 hours to one week.
Step 5: Review Loan Terms
When you receive approval with loan terms, it's important to review the loan terms offered by the lender carefully. Check Interest rates, repayment terms, and any associated fees to understand the cost of the loan.
Step 6: Acceptance
After reviewing the terms and ensuring that you're able to meet repayment terms, you can accept the loan offer. You may be asked for additional information or verification before signing the loan agreement.
Step 7: Receive Funds
Once you accept the loan, the funds will be deposited into your bank account, often even on the same day. Repayment starts according to the agreed-upon schedule. Double-check when the first payment is due to avoid a late payment!
Obtaining A Signature Loan With Less Than Ideal Credit
Getting a signature loan is still possible even with a less-than-perfect credit score. Strategies for improving your chances of approval include:
Check Your Credit Report
You can start by checking your credit report at annualcreditreport.com. You're entitled to a free credit report from all three credit bureaus: Equifax, Experian, and TransUnion, every year. Check your credit report for errors or inaccuracies and dispute them with the credit bureau showing the errors.
You can also use free credit reporting services like those available from many major banks and credit card issuers to monitor and address issues.
Research Lenders
The next step is to research lenders that offer signature loans to borrowers with lower credit scores. Online lenders and credit unions may be more flexible with credit score requirements. You also have the option to get prequalified with these lenders to see the interest rate and terms you can expect.
Consider A Co-Signer
Having a co-signer with a stronger credit history can improve your approval chances. Of course, a co-signer is responsible for loan repayment if you fail to pay. The risks of getting a co-signer include strained relationships or harm to the co-signer's credit score if you fail to repay the loan.
Provide Collateral
The option of providing collateral, such as a vehicle or savings account, to secure the loan can increase the chances of approval. Collateral provides assurance to the lender and may lead to better terms.
Demonstrate Income Stability
Lenders look for borrowers who are able to show a stable source of income. Employment history, regular paychecks, or significant savings can all demonstrate the potential for loan repayment.
Using Signature Loans
While interest terms on loans mean it's always better to save up for a big expense ahead of time, if you need a fast infusion of cash, signature loans can help. From home improvement to debt consolidation, signature loans can offer favorable terms and simple repayment terms for emergencies or to get out of debt. Check out the best personal loans for businesses if you're thinking about business expansion.
Frequently Asked Questions
How can I use a signature loan?
You can use a signature for anything, from medical expenses to home repair or debt consolidation.
What are the typical interest rates for signature loans?
Typically, interest rates for signature loans range from 4.6% to 30%, with average rates around 11%.
How much can I borrow with a signature loan?
How much you can borrow with a signature loan will depend on your credit score, income, and lender’s limits. Signature loan amounts typically range from $1,000 to $50,000.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.