What is a signature loan? What to know before taking one

A signature loan, also known as a personal loan or unsecured loan, is a type of loan that is granted based solely on the borrower’s creditworthiness and promise to repay the loan, without the need for any collateral or security. Here we tell you about what is a signature loan.

Unlike secured loans, such as mortgages or auto loans, which are backed by an asset, a signature-only loan relies on the borrower’s signature as a promise to repay the loan.

Because there is no collateral, signature loans typically have higher interest rates than secured loans. The amount that can be borrowed and the interest rate depend on the borrower’s credit history, income, and other financial factors. Single-signature loans can be used for a variety of purposes, such as debt consolidation, home improvement, medical, or other personal expenses.

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What is an example of a signature loan?

There are many examples of signature loans, to name a few:

Debt consolidation

A borrower with multiple credit card debts and other high-interest loans could take out a signature loan to consolidate all debts into one payment at a lower interest rate.

Home improvements

A borrower who wants to make home improvements, such as a new roof or a renovated kitchen, can take out a signature loan to finance the renovations.

Medical expenses

A borrower who has unforeseen medical expenses, such as an operation or hospital stay, could borrow from the firm to cover the costs.

Emergency expenses

A borrower who has an unexpected emergency, such as a car breakdown or home repair, could borrow from the firm to cover expenses.

Pros and cons of signature loans

Before taking out a signature-only loan, be sure to weigh its pros and cons, including: 

Pros

Fast funding

Some lenders offer loan funds the same business day or within business days of loan approval.

No collateral

Since all signature loans are unsecured loans, you don’t have to worry about the lender repossessing your car or foreclosing on your home (unless a court enters a judgment in the lender’s favor).

Lower interest rates than credit cards

The average interest rate on personal loans is generally lower than on credit cards. 

Cons

Fees

Many lenders charge origination, late payment, and prepayment fees, which can significantly increase the cost of the loan.

Potentially high-interest rates

If you have bad credit, the lender may charge you a high-interest rate. Some lenders advertise maximum interest rates in excess of 30%.

What’s the difference between a personal loan and a signature loan?

The main difference between a personal loan and a signature loan is that a personal loan may or may not require collateral, while a signature loan is always unsecured. Credit requirements, interest rates, and loan amounts may also vary between the two types of loans. There are some distinctions between the two, though:

Collateral

Depending on the lender’s regulations and the borrower’s credit history, a personal loan may or may not require collateral. A signature loan, on the other hand, requires no collateral and hence no guarantor.

Credit requirements

Personal loans and signature loans are often approved based on a borrower’s creditworthiness, however, each lender may have different standards. Given that they are entirely unsecured, signature loans could have more stringent credit standards.

Interest rates

Due to the greater risk to the lender, personal and signature loans frequently have higher interest rates than secured loans like mortgages or auto loans. However, interest rates may differ from one lender to another and may be based on the borrower’s financial status and credit history.

Loan amounts

Because personal loans can be secured or unsecured, they may offer bigger loan amounts than signature loans. Given that they are always unsecured, signature loans may have lower sums.

What is the purpose of a signature loan?

The purpose of a single-signature loan is to provide borrowers with access to funds that they can use for a variety of personal expenses, without the need for collateral. Single-signature loans often support high-interest debt consolidation, home improvements, unforeseen expenses, or major purchases.

These are some of the most common purposes of signature loans:

Debt consolidation

Signature loans allow you to consolidate several high-interest debts, such as credit card debt, into a single loan with a lower interest rate.

Home improvements

Borrowers can use signature loans to finance home improvements, such as a new roof, kitchen or bathroom renovation, or other renovations.

Medical expenses

Single-signature loans allow you to pay for unforeseen medical expenses.

Educational expenses

Signature loans can help borrowers pay for education-related expenses, such as tuition, books, and other educational expenses.

Major purchases

Signature loans allow you to finance major purchases, such as a car, boat, or other large items.

Other personal expenses

Signature loans allow you for other personal expenses, such as weddings, vacations, or other major events.

Is signature loan legit?

Absolutely, many reputable lenders provide signature loans as genuine borrowing options. Those who need to borrow money for various personal reasons but do not want to utilize collateral to secure the loan often turn to signature loans, also known as personal loans or unsecured loans.

Nonetheless, before signing a contract, it is crucial to carefully analyze the loan’s terms and conditions as with any sort of loan. When accepting a loan, borrowers should make sure they fully grasp all of the terms, including the interest rates, fees, and payback schedule.

Customers should also only engage with reputed lenders and steer clear of those who use aggressive strategies, such as levying exorbitant fees or applying high-pressure sales practices. Borrowers can locate valid and advantageous single-signer loans that satisfy their financial demands by exercising due diligence and engaging with reputable lenders.

Where can I get a signature loan?

You can obtain a signature-only loan application from various financial institutions, such as banks credit unions, and online lenders. 

Banks

Signature-only loans are provided by conventional banks. If you do business with a bank, inquire with their customer service division about their availability of signature-only personal loans. Being a customer may entitle you to a discounted interest rate. Another choice is to give a bank a call to inquire about their availability of unsecured personal loans.

Credit Unions

Some credit unions offer signature loans, and the interest rate is usually lower than what banks offer. However, to get a personal loan at a credit union, you must be a member or apply for membership. 

Online lenders

Unsecured personal loans are available from numerous online lenders. You can search for specific lenders or go to an internet marketplace to find them. One benefit of applying with an online lender is that the majority allows you to pre-qualify without harming your credit score in order to check predicted rates and conditions.

Signature loans are an excellent option to solve an immediate problem. However, bear in mind the following disadvantages so that you don’t get caught out by commissions. You have many options to apply for a signature loan.

Written by Vanessa Gallanti. April 19, 2023

Enthusiast about planning, project management, construction materials and technology, and construction. A civil engineer from Los Andes University and a content writer for Kukun.