What is a Signature Loan and How Does it Work?

Person Signing Loan Agreement

If you are exploring different types of loans in order to create a short-term financial solution to a shortfall, one type of loan you should know about is a signature loan.

A signature loan is one of the best ways for an individual to secure funds without necessarily putting your assets on the line. In other words, it is a loan that does not require collateral in exchange. The funds you will receive are not contingent upon the lender holding a title to your car or boat or home, for example.

Since this sounds like the best-case scenario, you may be wondering why a consumer would go after any other kind of loan. The most common answer to that can be summed up in two words: bad credit.

How Do Signature Loans Work?

Borrowers are able to take out a signature personal loan in a few easy steps. On their loan application, they must provide lenders with a credit history and income history. As long as their credit is good and their income is high enough to repay the loan monthly payment, the funds are easily secured.

However, “easy” is not always the best way to describe signature loans for borrowers with more complicated credit or income histories. Unfortunately, if your credit score was severely dinged after you maxed out one too many credit cards, or if your employment history is spotty in recent years, this would not reflect well to a lender at a financial institution. In this case, you would be an unlikely candidate to receive loan funds.

Signature loans are a loan agreement often known as “good faith loans” or “character loans,” as the lender deems the individual responsible and trustworthy enough to pay the money back thanks to solid credit history.

How Much Can I Borrow with a Signature Loan?

If you have a solid credit history and earn enough money to qualify for a signature loan, you could borrow as little as $500 or as much as $50,000. More often than not, signature loans are for smaller, more modest amounts.

Even when the borrower has a strong credit history, there is still a certain level of risk for the lender. They are offering the funds with no collateral involved, so the creditworthiness of the borrower is key for securing loan approval.

Are There Any Restrictions on How I Can Use the Funds?

The good news for borrowers is that they can use the funds from a signature loan any way they want. People take out a signature loan to pay for unexpected expenses like medical bills, to fund a small home improvement project or even debt consolidation. This is a great loan option as there is no “required” list of reasons to secure your much-needed cash, as is the case with a student loan, auto loan, or mortgage.

Man with Money

My Credit is Not Great: Can I Still Get a Signature Loan?

The hard truth of signature loans is that the lower your credit score, the harder it is to get one.

The typical minimum credit score when it comes to signature loans is 660, and in some cases, it can be 700. In case you are unfamiliar with credit scoring (and now is the time to get familiar, if you are looking for a loan!), here is how the scores are broken down:

300-579: Very Poor

Borrowers in this range are typically rejected by lenders, or if they are approved, they will likely be required to pay some type of initial loan payment fee or upfront deposit to secure a loan.

580-669: Fair

Borrowers who fall into this category may also be referred to as “subprime borrowers.”

670-739: Good

In this range, borrowers are more likely to be approved for loans, but not always at the best rates.

740-799: Very Good

This category finds borrowers receiving much better interest rates on loans.

800-850: Exceptional

This is the ideal scenario for a borrower and the lender, who has great assurance the money will be paid back.

It is possible to take out a personal loan with a score of 600 or lower, but not likely. In order to do so, you would probably need a consignor on your loan and you would be subject to a high interest rate.

Signature Loans: What to Look Out for Before You Sign

While a signature loan can be helpful it can also be tricky and even dangerous for those with uncertain financial scenarios.

If you have a bad credit history and wind up with a high-interest loan, you could easily end up in worse shape than before you received the loan, which is the last place any borrower wants to be.

Before you sign on the dotted line, make sure you have considered:

  • The interest rate of the loan
  • The late payment fees (These can also affect your credit score unfavorably)
  • The origination fee (Which may be charged by a lender to process a new loan)
  • The early payoff fee (It seems hard to believe there is a penalty for paying a loan before it is due, but these do exist)

Person Signing Loan Agreements

Is a Signature Loan a Secured Loan?

Another bit of loan terminology you may be coming across as you investigate possible options is the idea of a “secured loan.”

This simply means a loan that is tied to collateral; so, a signature loan is in fact an “unsecured loan.” You may also hear it called an “unsecured personal loan.”

What Steps Should I Take to Apply for a Signature Loan?

If you are in need of a short-term financial solution, we suggest the following:

  1. Exhaust all other options before taking out a loan. This could mean trimming unnecessary expenses from your household budget.
  2. Check your credit score and make sure you are in a high enough range to qualify for a loan.
  3. Gather all of the information you will need to apply (such as pay stubs, W-2s, mortgage statements, etc)
  4. Shop around for a loan with the lowest interest rates and fees.
  5. Read all the fine print (several times!) before signing on the dotted line.
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Jen M.

Jen has been with DCCU since she graduated from UW Madison - a long time ago. As the Content Strategist she helps share all the amazing things DCCU does in our community and spreads the credit union philosophy of People Helping People. When she's not working for the best credit union in south central Wisconsin, she's busy with 4 kids and a feisty little dog at home. She formed her family through adoption and has a deep passion to support foster and adoptive parents and kids. Her favorite place to relax is poolside or in front of the fireplace.