What is a signature loan?

If you want a loan that doesn’t require putting up an asset like your home or your car as collateral, a signature loan might be a good choice for you. Just beware of potentially high fees and interest rates attached to a signature loan, which is based on your credit history, credit scores and income.

A signature loan may be an easy path to fast cash, but that doesn’t mean it’s always the right choice. Before putting down your signature and placing your credit on the line, first consider factors like the interest rate, fees and whether you can do without the loan altogether.

• What is a signature loan?
• When does a signature loan make sense?
• Where can I get a signature loan?
• What to look out for with signature loans
• How to apply for a signature loan

What is a signature loan?

A signature loan is a good-faith loan that doesn’t require any form of collateral. Collateral is property or an asset that you promise to a lender to secure a loan in the event you stop making payments. You provide your personal information, including income and credit history, along with a signature and your promise to pay back the loan.

A signature loan is often an installment loan. This means you make regular monthly payments over the life of the loan until it’s paid off. The payment amount is typically the same for all installment payments over the life of the loan.

If you stop making payments on an unsecured loan, the lender can’t come after your home or other assets. Instead, the only major cost comes in the form of damage to your credit history and credit scores. Negative information like nonpayment of a loan can stay on your credit reports for seven years. Bankruptcies can stay on your reports for up to 10 years. This can keep you from getting approved for future loans and can lead to higher interest rates.

While a signature loan puts your credit on the line, you should take that commitment to repay the loan very seriously. If you don’t, you could be dealing with the financial repercussions for a long time.

When does a signature loan make sense?

A signature loan can be quite expensive, depending on the interest rate you get. Like any other loan, you shouldn’t rush and apply without putting serious consideration into the costs of a monthly payment, whether you truly need the funds and how you plan to repay the loan.

It’s best to pay for any unexpected expenses from an emergency fund or other savings. But this may not be possible for everyone. According to a Federal Reserve survey, just 40% of Americans have enough savings put away to cover an unexpected $400 expense. If that sounds like you, a signature loan could be a reasonable option.

One potential use of a signature loan is debt consolidation. For example, if you can consolidate multiple high-interest credit cards into one installment loan at a lower rate, you could potentially save money on interest. Other potential uses for signature loans include medical bills, wedding expenses and major home improvement projects.

Where can I get a signature loan?

Unsecured loans are available from a range of lenders, like traditional banks, credit unions and online lenders.

One note of caution: You’ll want to take care to avoid predatory payday lenders that offer high-interest loans.

What to look out for with signature loans

The biggest downside to taking out a loan of any type is the cost. Borrowers with good credit may qualify for better rates and more favorable terms, while the choice of loans for applicants with less-than-perfect credit histories may be limited and come with higher interest rates.

In some cases, a bad credit history could mean you wind up with an interest rate of 30% or higher from a signature loan. Review all loan terms, including fees, before signing up for a loan. Here are some important items where you should be sure to pay attention.

• Interest rate — Other than your loan amount, this is likely the main cost of the loan. The total interest cost is driven by your interest rate, how much you borrow and the term of the loan.
• Origination fee — Some lenders charge this extra fee to process a new loan.
• Early payoff fee — Some lenders charge an extra fee if you pay off the loan before the term’s schedule, also known as a prepayment penalty. Avoid this type of fee when possible by passing on loans that charge them.
• Late payment fee — You can avoid late payment fees (and their ding on your credit reports) by paying on time. When you pay late, most lenders charge a late payment fee. 

This isn’t an exhaustive list. Check with your lender and read all loan documents to get details for all of the potential costs of your signature loan.

How to apply for a signature loan

Applying for a signature loan is usually easy and perhaps faster than some other kinds of quick loans, though getting approved may be a challenge — it depends on your credit health. Many lenders offer an online loan application where you can apply for a signature loan in just a few minutes.

Before you begin the application process, make sure to have your personal information available, like your contact information, Social Security number and proof of income. Depending on the lender, an approval and funding may take anywhere from a day to a few weeks.

Bottom line

If you need cash quickly, a signature loan might be an option that can give that short-term solution. But make sure you consider your entire financial health and why you’re short on funds.

If you live paycheck-to-paycheck, you should consider reviewing your budget and recurring monthly costs to make sure your money is going toward expenses you need or value most.

A signature loan may be a fit for your needs, but it can be expensive, particularly if you have poor credit health. Do your research and shop around to find the best rates and fees if you do decide that a signature loan is right for you.