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How Signature Loans Work
When you need extra cash, a signature loan may be the answer. These loans provide funds you can use for almost anything—including debt consolidation, home improvements, major purchases, and more. They’re relatively quick and easy to apply for, and you typically pay off your debt within a few years.
Payment Term
You typically pay off signature loans over one to five years, but other terms are available. If you want to pay off debt quickly, look for lenders that do not charge prepayment penalties.
Borrowing Process
Interest Rates
The rate you pay primarily depends on your credit. Some lenders charge rates around 30% APR. See how your credit score and interest rate impact your monthly payment for a loan, using our personal loan calculator.
Amount Available
Because there is no physical asset to secure a signature loan, the amount you can borrow may be relatively small. For example, home loans can be hundreds of thousands of dollars, but the property—ideally worth more than the loan amount—secures the loan. With signature loans, your credit, income, and other factors determine how much you can borrow. A history of successfully borrowing and repaying should let you borrow more. But new borrowers—or those with negative items in their credit reports—may be limited to smaller loans.
Approval
If you don’t have sufficient credit or income to get approved for a signature loan, you have several options:
Ask a co-signer to apply for the loan with you: The co-signer promises to repay, so they’re 100% responsible if you can’t make payments for any reason. Pledge collateral and use a secured loan instead: Collateral can include vehicles, valuables, assets in banks or investment accounts, and more. Build credit by borrowing and repaying: Over time, your credit scores will improve, and you’re more likely to get approved in the future. Unfortunately, the process may take several years.
Types of Signature Loans
Any unsecured personal loan is a signature loan. Although lenders market a variety of loans for specific uses, you’re still borrowing without collateral based on your credit and income.
Standard Personal Loans
Banks and credit unions have a long history of offering personal loans, and it’s worth checking rates and fees with a bank in your area. Credit unions often use the term “signature loan,” while banks use other names.
Peer-to-Peer (P2P) Loans
Online lenders provide funds from a variety of sources. Your loan may come from individuals with extra cash to lend or investors hoping to lend to borrowers like you. The application process for P2P loans is often streamlined and mobile-friendly, and lenders might use “alternative” credit information such as your rent and utility payments.
Debt Consolidation Loans
If you have high-rate debt but you can qualify for a lower-cost signature loan, you may be able to save money—and eliminate debt faster. You can borrow enough to pay off those debts, stop using credit cards (or whatever caused the debt), and pay down the balance with fixed monthly payments.
Wedding Loans
Some lenders specialize in funding weddings and other events, but it may be wise to start your life together without debt.
Medical Loans
Doctors and clinics may offer funding for treatment through affiliated lenders. Those loans are available for everything from dental work to fertility treatment.
Payday Loans
Payday loans are also unsecured loans because lenders have no physical asset to take possession of if you don’t repay. It’s usually best to avoid payday loans.
Installment Loans
Again, this is another name for a personal loan that you pay off with fixed monthly payments over time. Money stores and payday lenders increasingly use the term “installment loan,” and they tend to have higher financing costs than traditional or online lenders. Whatever your needs are, a signature loan may help. Compare offers from several sources, including online lenders and traditional banks or credit unions. Evaluate the interest rate you pay, fees required to fund the loan, and any prepayment penalties before you choose a lender.
