Posted by: Adam McCann

A signature loan is a type of personal loan that does not require collateral other than the borrower’s signature, which represents their “good faith” promise to repay the loan. In other words, a signature loan is the same thing as an unsecured personal loan. The borrower’s signature on a signature loan makes the loan a legally binding agreement.

The alternative to a signature loan is a secured personal loan, which requires the borrower to put up a valuable object as collateral. Some types of collateral that a lender might accept include cars, real estate, stocks, savings accounts/CDs, and collectibles of value.

Signature loans carry much more risk for the lender. If the borrower defaults (i.e., cannot pay the loan back), the lender has no way to immediately collect what they owe, since there’s no collateral to take possession of and sell. With a signature loan, the lender will likely first try to get the money through collections. If that doesn’t work, they may take the borrower to court to try to garnish their paycheck or bank account.

How Does a Signature Loan Work?

1. The prospective borrower submits an application to the lender.
2. The lender evaluates the application based on the prospective borrower’s credit history, income and other information such as existing debt load.
3. Assuming the lender approves the borrower, the borrower signs the loan agreement, legally promising to repay the money. For online borrowing, the lender will require an e-signature.
4. The lender transfers the money to the borrower. Signature loans are typically between $1,000 and $100,000, and the borrower can usually use the money for almost any expense.
5. The borrower makes monthly payments on the loan until it is paid off. APRs typically range from 6% to 36%. For some loans, there may be an origination fee of 1% to 8% of the loan amount.

What Makes Signature Loans Unique?

Other than their lack of collateral, signature loans have a few other characteristics that separate them from secured personal loans. The first is that they’re significantly harder to get. Signature loans usually require a credit score of at least 660 for approval. Some even require scores of 700+ (good credit). There are a few signature loan providers that service people with credit scores as low as 585, but they are less common and have very high APRs.

The reason signature loans typically require higher credit scores is that borrowers with lower credit scores carry a higher risk of defaulting. It’s especially important for lenders to minimize the odds of default when there’s no collateral securing the loan. In contrast, since secured personal loans offer a way for the lender to recoup their money easily no matter what, lenders are usually inclined to offer them even to people with bad credit.

The other major way that signature loans differ from secured personal loans is that they tend to be more expensive. Sure, signature loans can have very low rates for people with excellent credit, starting at around 4% - 6% with the best lenders. But borrowers with subpar-to-good credit scores are likely to get a much better rate on a secured personal loan than on a signature loan. This is again due to the greater risk for the lender with a signature loan. Since lenders can’t get their money back instantly after a default, they charge higher rates.

Who Should Get Signature Loans?

Signature loans work best for people with good-to-excellent credit, as they have a shot at qualifying for low APRs and no origination fees without having to put any collateral on the line.

For people with lower credit scores, signature loans may still be attainable but could be very expensive. Getting a secured personal loan instead is a good way to cut costs and increase approval odds. But secured personal loans come with the risk of losing the collateral used to get them, so it’s up to the borrower to determine whether the risk is worthwhile.

The best way to estimate your odds of qualifying for a signature loan is to use WalletHub’s free pre-qualification tool. You’ll be able to see which lenders are likely to approve you, along with an estimation of what APRs you might receive.

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via Finance Xpress