Short Answer
A signature loan is an unsecured loan that does not require you to provide collateral such as a car or house. Instead, you generally qualify based on factors such as your credit history, income, debts, and ability to repay, and you agree to repay the loan according to its terms. Because there is no collateral securing the debt, the interest rate may be higher than for some secured loans.
What Is a Signature Loan?
A signature loan is generally a type of unsecured personal loan. It gets its name from the idea that the borrower’s signature or promise to repay serves as the basis for the loan rather than a specific asset being pledged as collateral.
Unlike a secured loan, you typically do not pledge a vehicle, house, or other property to obtain the loan.
The lender may instead evaluate your:
- Credit history
- Credit score
- Income
- Existing debts
- Requested loan amount
- Repayment ability
- Other information used in the lender’s underwriting process
The exact requirements vary by lender.
How Does a Signature Loan Work?
With a typical signature loan, you apply for a specific amount of money. If approved, the lender provides the funds and you agree to repay the amount according to the loan agreement.
A personal installment loan, for example, generally provides the borrowed money upfront and requires repayment in scheduled installments over a specified period.
A signature loan may work like this:
- You submit an application.
- The lender evaluates your creditworthiness and financial information.
- The lender offers loan terms if you qualify.
- You review and sign the agreement.
- The lender provides the funds.
- You make the required payments until the loan is repaid.
Is a Signature Loan Secured or Unsecured?
A signature loan is generally unsecured.
That means you do not provide specific collateral to secure the loan.
For example, with an auto loan, the vehicle generally serves as collateral. With a mortgage, the home serves as collateral.
With an unsecured signature loan, there is generally no specific asset pledged to the lender.
Because unsecured loans provide less protection to the lender if the borrower defaults, lenders may charge higher interest rates than they would for comparable secured credit.
What Can You Use a Signature Loan For?
Depending on the lender’s terms, a signature or unsecured personal loan may be used for various personal expenses.
Possible uses can include:
- Debt consolidation
- Unexpected expenses
- Home improvements
- Large purchases
- Medical expenses
- Moving expenses
- Other personal expenses
However, lenders can restrict how their loans may be used, so borrowers should check the loan agreement before using the funds.
How Much Can You Borrow With a Signature Loan?
There is no single standard amount for all signature loans.
The amount you can borrow depends on the lender and factors such as your credit profile, income, existing debts, and repayment ability.
Some lenders may offer relatively small personal loans, while others may offer substantially larger amounts.
The lender’s underwriting criteria determine the amount and terms you qualify for.
What Are the Advantages of a Signature Loan?
One potential advantage is that you generally do not have to pledge an asset as collateral.
This means you are not specifically putting your car, house, or another asset up as security for the loan.
Another potential advantage is that personal installment loans can provide a fixed amount of money with scheduled payments over a defined period.
Signature loans can therefore be useful for borrowers who need a specific amount of money but do not want or cannot provide collateral.
What Are the Disadvantages of a Signature Loan?
The biggest potential disadvantage is that an unsecured loan can have a higher interest rate than some secured alternatives.
Your creditworthiness can also significantly affect the rate and terms you receive.
Other costs may include:
- Origination fees
- Late-payment fees
- Other lender charges
- Interest charges
The CFPB recommends understanding the interest rate, fees, and other terms before accepting a personal installment loan.
Signature Loan vs. Secured Loan
The main difference is collateral.
A secured loan is backed by an asset. For example, an auto loan is generally secured by the vehicle.
A signature loan is generally unsecured, meaning there is no specific collateral backing the loan.
If a borrower fails to repay an unsecured loan, the lender can still pursue collection and other legal remedies allowed by law. Unsecured does not mean the debt disappears if the borrower stops paying.
Signature Loan vs. Personal Loan
The terms can overlap.
A signature loan is generally a form of unsecured personal borrowing, while “personal loan” is a broader term that can describe different types of consumer loans.
Some lenders may specifically advertise an unsecured personal loan as a signature loan, while others may simply call it a personal loan.
Therefore, it is more important to look at the actual loan agreement than the label used by the lender.
Does a Signature Loan Require Good Credit?
Not necessarily, but creditworthiness is commonly an important part of the approval process.
Lenders may consider your credit history, income, debts, loan amount, and other factors when determining whether to approve an application and what terms to offer.
A borrower with stronger credit may qualify for more competitive terms, but approval requirements differ between lenders.
What Happens If You Do Not Repay a Signature Loan?
Because the loan is unsecured, the lender does not normally have a specific asset that it can simply repossess as collateral.
However, failing to repay can still have serious consequences.
Depending on the loan and applicable law, the lender may:
- Charge late fees
- Report missed payments to credit reporting companies
- Send the account to collections
- Pursue legal action to collect the debt
The CFPB notes that missed payments on personal installment loans can affect your credit reports and scores and may result in collection activity.
What Should You Check Before Getting a Signature Loan?
Before accepting a signature loan, compare the complete cost of borrowing.
Check:
- Interest rate
- APR
- Loan amount
- Monthly payment
- Loan term
- Origination fees
- Late fees
- Prepayment terms
- Total amount you will repay
Do not choose a loan solely because it has a low monthly payment. A longer repayment period can result in more interest being paid over the life of the loan.
Example of a Signature Loan
Suppose you need $5,000 for an unexpected personal expense.
You apply for an unsecured signature loan and the lender approves you for $5,000.
The lender gives you the money, and you agree to repay it through monthly installments over a specified period.
Because the loan is unsecured, you do not pledge your car or house as collateral.
Your actual interest rate, monthly payment, fees, and total repayment amount will depend on the lender and the terms you receive.
Final Answer
A signature loan is generally an unsecured personal loan that does not require collateral. Instead, the lender evaluates your creditworthiness, income, debts, and other factors before deciding whether to approve the loan and what terms to offer. You receive the money upfront and repay it according to the loan agreement. Because there is no specific collateral securing the debt, a signature loan may carry a higher interest rate than some secured loans.