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A signature loan is a loan that’s guaranteed by your promise to repay the money you borrow, rather than collateral. Most personal loans are signature loans.
When you get an auto loan or mortgage, your car or home serves as collateral that your lender can seize if you don’t repay funds as agreed. But since a signature loan isn’t backed by collateral, there’s no asset your lender can seize if you don’t make payments.
» MORE: What is a personal loan?
How does a signature loan work?
Since signature loans are unsecured, lenders evaluate your ability to repay. They’ll likely look at your credit score, credit history and debt-to-income (DTI) ratio when deciding whether to approve or deny your application.
Unlike a secured loan, a signature loan doesn’t put your assets at risk. But if you don’t make agreed-upon payments, you’ll likely incur late fees, hurt your credit score and have trouble borrowing in the future.
If you’re approved for a signature loan, you’ll receive the loan in a lump sum. You’ll then repay it over a set term, usually two to seven years, via monthly installments.
Signature loans come with fixed annual percentage rates (APR), which include interest and any fees, so the monthly payments won’t change over time.
For example, if you’re approved for a two-year, $10,000 signature loan at a 12% APR, you’ll make monthly payments of $471 for the duration of the loan. It will cost $1,298 in interest.
Most financial experts agree that an affordable signature loan has a maximum APR of 36%.
» COMPARE: Best unsecured personal loans
Signature loans vs. other types of credit
A signature loan is one option when you need to borrow money. Here’s how they stack up to other forms of credit.
Signature loan vs. personal loan
A signature loan is an unsecured personal loan by a different name. Sometimes called a “good faith” loan, lenders determine an amount you qualify to borrow based on your income and credit history, rather than requiring collateral that the lender could repossess for nonpayment. In return, lenders require only a signature to guarantee monthly repayments over the term.
Signature loan vs. secured loan
A signature loan doesn’t require collateral, whereas a secured loan is backed by an asset that your lender can repossess if you don’t make payments. Examples of secured loans include mortgages, car loans and home equity loans, though some lenders offer secured personal loans using a bank account or car title as collateral.
You may be able to borrow more or lock in a lower APR by opting for a secured loan instead of a signature loan. However, a secured loan puts your asset at risk if you can’t make payments.
Signature loan vs. revolving credit
A signature loan gives you a lump sum that you repay (with interest) in fixed monthly payments over a set term, whereas revolving credit provides continuous access to a line of credit. You can borrow against it and repay it as needed, but you’ll need to make minimum monthly payments and avoid exceeding your credit limit. Credit cards and personal lines of credit are both forms of revolving credit.
Revolving credit tends to be more flexible than a signature loan because you have ongoing access to funds and can limit your borrowing to what you need. While revolving credit tends to have higher interest rates than signature loans, you’ll only pay interest on the amount you spend and carry over from month to month. With an installment loan, you pay interest on the full amount you borrow.
What are the best uses of a signature loan?
A signature loan can be used for almost anything, from paying for an emergency car repair to funding a vacation. NerdWallet recommends using a signature loan only to cover a needed expense or to improve your overall finances.
One of the best ways to use a signature loan is to consolidate debt. If you can qualify for a signature loan with a lower APR than your combined debts, you could use the loan to pay off those debts, then make one simplified payment toward your new loan.
Since that loan has a lower interest rate, you’ll pay less in interest and likely have lower monthly payments. Use our debt consolidation calculator to see how an unsecured loan can help you pay off your debts.
Other uses for a signature loan include funding a home improvement project — ideally one that increases the value of the home — or refinancing an existing personal loan at a lower rate.
Signature loan pros and cons
Signature loan pros
- No collateral required. Since a signature loan is guaranteed by your creditworthiness, you don’t have to put assets at risk.
- Fast funding. Some signature loans can fund on the same day you’re approved or the next business day.
- Flexibility. You can use a signature loan for almost any purpose, including debt consolidation, a home improvement project or an emergency expense.
Signature loan cons
- Often requires good credit. Because you don’t put down collateral, many lenders require a good credit score and low DTI to approve you for a signature loan.
- May have fees. Some signature loans require you to pay an upfront charge called an origination fee of 1% to 10% of the loan amount, on top of interest. Many lenders deduct this charge from the loan amount, which lowers the amount you borrow.
- Not always the cheapest way to borrow. You may have cheaper financing alternatives, like a 0% APR credit card, home equity loan or borrowing money from a family member or friend.
Where to get a signature loan
You can get a signature loan from an online lender, bank or credit union. These loans may be called unsecured personal loans, but they’re the same thing.
Online lenders: Online lenders offer unsecured personal loans ranging from $1,000 to $100,000 for borrowers with bad to excellent credit. Those with limited or spotty credit histories may find more options with online lenders, but rates can be high. You can apply for these loans online, and they’re often funded the same or next business day.
» COMPARE: Best online loans
Banks: Not all banks offer unsecured personal loans, but those that do usually cater to borrowers with good to excellent credit (mid-600s and higher) with loans from $1,000 to $100,000. You may need to be a current customer to apply for a loan, and customers tend to see the most perks, like rate discounts or higher loan amounts.
» COMPARE: Best bank loans
Credit unions: Credit unions provide unsecured personal loans ranging from $250 to $50,000. If you have fair or bad credit (mid-600s and lower), credit union loans may have especially low rates and flexible terms compared with other lenders. You will need to become a member of the credit union before applying.
How to get a signature loan
- Compare and shop: Before applying for a signature loan, shop around to ensure you’re getting the most affordable loan possible, which is typically the one with the lowest APR. Pre-qualifying is one of the best ways to do this and includes filling out a short preliminary application, then submitting to a soft credit check, which won't hurt your credit score. Then, the lender displays the rates and terms you may be eligible for. Pre-qualifying with more than one lender is in your best interest, since there’s no risk to your credit score, and you’ll get to compare more options.
- Submit your application: After selecting the best offer, you’re ready to submit the application. Applications vary by lender, but most will ask for personal details like your name, Social Security number and contact information, and details about the loan you want, like the loan amount, loan purpose and desired repayment term.
- Get approved and funded: Once you submit the application, the lender will conduct a hard credit check, which will temporarily lower your credit score by a few points. Once you’re approved, you could receive the funds as early as the same day or within one week, depending on the lender.
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