What Is A Signature Loan? Definition And Process

If you’re in need of some quick funds to help consolidate credit card debt, fund a home improvement project or pay off medical bills, a signature loan may be the perfect option. But what exactly is a signature loan and how does it work?

A signature loan, by definition, is a type of personal loan that doesn’t require collateral. Let’s learn more about this form of financing and how to apply for it so you can decide whether a signature loan is the right choice for you.

As mentioned, a signature loan (sometimes called a “good faith” loan) is an unsecured personal loan, which means it doesn’t require the borrower to use collateral. Instead, the applicant only needs to meet the lender’s income and credit requirements – and provide their signature – to qualify.

Signature loans are a popular source of funding since they can be used for almost anything. Common reasons to seek a personal loan include:

• Debt consolidation
• Home renovations and repairs
• Unexpected expenses
• Large purchases

Signature Loan Vs. Personal Loan

The term “signature loan” is used in reference to an unsecured personal loan only. While most personal loans are unsecured, some lenders do offer secured loan options, which require collateral and aren’t one and the same with signature loans. When looking for a signature loan, make sure you understand the lender’s terms and conditions before signing any paperwork.

Signature personal loans are considered installment loans. That means the borrower repays the loan amount in regular payments on a set schedule. And since most personal loans have a fixed interest rate, your monthly installments will most likely be a consistent dollar amount.

To get the loan, you’ll need to submit an application to the lender of your choosing. From there, the lending institution will pull your credit history using a hard inquiry. They’ll also check your income and ask for personal financial information.

Once you’re approved, the lender will send you the funds in a single lump sum via check or direct deposit. After receiving the money, you’ll be responsible for making monthly payments over the repayment term.

Signature loans typically have a repayment period of 2 – 5 years, but the repayment period can extend up to 7 years in some cases. Interest rates for this type of financing can also vary widely depending on the lender and the financial standing of the borrower. Interest rates on personal loans can be as low as 4%, as high as 36%, or anywhere in between.

If you’re considering a signature loan, a few types of lenders offer this product.

• Traditional banks: Many local and national banks offer signature loans. If you’re already a customer, your bank may offer you a discounted interest rate.
• Credit unions: Since credit unions are nonprofit organizations, they often have fewer fees and lower interest rates than more traditional lenders. However, they may impose stricter eligibility requirements on borrowers.
• Online lending platforms: Finding a loan option that fits your needs can be as simple as searching online. Many online lenders offer a quick approval process and a wide variety of products.

Choosing any type of lender will come with certain benefits and drawbacks. That’s why it’s important to gather a few loan estimates from each type before choosing a lender to work with.

If you’ve decided that a signature loan is right for you, you’ll need to take a few actions in order to ultimately end up with the loan money in hand. Here’s a quick breakdown of the process from start to finish:

1. Research Several Loan Options

When you’re ready to shop for a signature loan, it’s wise to compare a few loan options. You can check lender websites to view their latest offerings or talk with a representative to find out what rates and terms are available. After that, you can create a list of several lenders and their offerings to use in the following steps.

2. Get Prequalified

Once you have a few lenders picked for your list, you can get prequalified to learn more about each option. The lenders will make a soft inquiry on your credit and ask for information such as your name, date of birth, Social Security number, address and employment status. Afterward, they’ll send you a loan estimate with a predicted rate, term and monthly payment.

3. Compare Loan Estimates

After you’ve gathered all the loan estimates from your list of lenders, you can start comparing their rates and terms. Be sure to evaluate each option’s annual percentage rate (APR), which includes both interest and additional costs – like origination fees – that will provide a more accurate picture of the loan and how much you’ll be paying back.

4. Submit An Application

Once you’ve chosen a lender, you can apply for approval. Most lenders offer online forms you can submit without visiting a physical location. For this step, you’ll need to provide more information than the prequalification required. For example, the lender will ask for your bank statements, pay stubs, tax returns and a form of identification. 

5. Receive The Funds

Using your loan application and a credit inquiry, your chosen lender will evaluate your credit score and debt-to-income ratio (DTI). If you meet their requirements, you’ll be approved for the loan and receive your funds in a few business days.

Still not sure a signature loan is right for you? Learn more about signature loans with these frequently asked questions and their answers.

What credit score do I need for a signature loan?

In most cases, a borrower will need a minimum credit score in the 610 – 640 range to qualify for an unsecured personal loan. If you have a lower FICO^® Score, you might need to choose a secured option or ask someone to be your co-signer. Just be aware that some lenders, including Rocket Loans^SM, don’t accept co-signers. And, if you manage to secure a personal loan with a low credit score, you’ll most likely have a high interest rate or a short repayment term.

What can I use a signature loan for?

You can use a signature personal loan for almost anything, from paying for a medical emergency to funding a remodeling project. However, you can’t use a personal loan for nefarious purposes, such as illegal gambling or purchasing narcotics.

Should I use a signature loan?

Signature loans come with various pros and cons. For example, a personal loan can offer consistent monthly payments, a fixed interest rate and no collateral requirements. On the other hand, a personal loan can carry a high interest rate if you have poor credit. Getting a personal loan will also increase your DTI, making it harder to qualify for additional financing.

Whether a signature loan works for you will depend largely on your personal situation and financial standing. If you can afford the monthly payments and secure a good APR, it might make sense to use this option.

Even though a signature loan requires more than a signature for loan approval, it can still be a great source of financing. And, if you have a good credit score, this type of loan can come with an affordable interest rate and a lengthy repayment term.

If you’re ready to find an unsecured personal loan, you can get prequalified today with Rocket Loans.