If you’re looking for a loan that doesn’t require you to put up collateral such as your car or home, a signature loan may be a good option. A signature loan is an unsecured loan you can take out simply by providing a lender with your income, credit history and signature. Also called a good faith or character loan, you can qualify for this type of loan if you have a good credit history and your income is enough that you can repay it.
How Does a Signature Loan Work?
You can use a signature loan for essentially anything you want. It’s an unsecured loan that can help you consolidate debt, cover an emergency expense, pay for a home improvement or even go on a vacation.
Your credit and income will determine the fixed interest rate of your signature loan. It’s important to note that since there are no assets or collateral involved, your interest rate may be higher than that of a comparable loan of another type. A signature loan term can range from a few months to five years, but most lenders offer shorter-term signature loans.
Is a Signature Loan the Same as a Personal Loan?
A signature loan is considered an unsecured personal loan. Whether a lender refers to it as a signature loan or an unsecured personal loan, there’s no collateral such as a house or car tied to the loan. Therefore, a signature loan requires a higher credit score and is more difficult to obtain than a secured loan such as a mortgage that’s secured by your house.
How Much Can You Borrow on a Signature Loan?
The bank or lender you choose will consider your credit history and income to determine how much money you can borrow with a signature loan. While signature loans can range from $500 to $50,000, they tend to be smaller because they are not backed by collateral and therefore present more risk to the lender.
How to Get a Signature Loan
If you’d like to take out a signature loan, follow these steps:
Check Your Credit Score
Before you apply for a signature loan, it’s a good idea to check your credit score. If your credit score is lower than you’d like it to be, you may want to focus on improving it. The higher your credit score is, the more likely it is you’ll receive a lower interest rate and more favorable terms. So, if you don’t immediately need the loan to cover an emergency expense, waiting until you’ve increased your credit score may be worthwhile.
Gather All of Your Information
Most signature loan applications will ask you for the same personal details. You’ll likely have to share your monthly income, the name of your employer, whether you’re a homeowner or renter and your monthly housing costs. You may need to provide your W-2 forms or pay stubs to prove your income, so having these documents handy is a good idea.
Compare Your Options
Don’t be tempted to go with the first signature loan lender you find—it’s important to do your research and compare all your options. That way, you can make an informed decision and reduce your risk of overpaying for your loan.
During your research, you’ll find that some lenders will list the minimum credit score they require for personal loans on their websites. If you come across a lender that seems like a good option but you don’t know if you’ll meet their requirements, you can always call or email them to find out. Applying for signature loans will result in hard inquiries on your credit report, so reduce the impact on your credit by limiting your application period to a short time frame and only applying to a few loans you’re confident you’ll qualify for.
If a lender can prequalify you for a loan, this will not affect your credit score. Prequalifying is a great way to get an idea of the types of offers you may receive.
Read the Fine Print
Once you find a signature loan you’d like to move forward with, read the fine print before signing on the dotted line. Look out for prepayment penalties, automatic withdrawals, origination fees, late payment fees and other details that can increase the cost of your loan or cause unwanted surprises.
Accept the Loan and Start Making Payments
If you’ve read the fine print and are satisfied with the terms, accept the loan. With some lenders you may get your money in a few business days, while others may take a bit longer. As soon as you receive your funds, take note of when your first payment is due and consider setting up automatic payments. Also, think about adding extra money to your payments each month so you can pay off your loan more quickly.