What Is A Signature Loan?

If you’re looking for financing, a signature loan can be a versatile solution. A signature loan is an unsecured personal loan that you can use for any purpose. Whether you need funds for your dream wedding, to fix a broken appliance or even add a pool to your home, you can get the money quickly and repay it over time.

Below, CNBC Select explains how this type of financing works, how you can obtain and what to consider before you do.

A signature loan is simply a personal loan that doesn’t require collateral. This means you don’t need to pledge any assets to get the funds. For example, a mortgage is secured by the home and an auto loan is secured by the car. A signature loan, on the other hand, is only secured by your signature.

You can use the money for almost anything, from unexpected expenses your emergency savings can’t cover to big purchases. Or, if you’re working to eliminate debt, a signature loan can be an excellent debt consolidation tool — provided you can qualify for an interest rate lower than your current debts.

Once the lender approves your application, you’ll get a lump sum. Many online lenders, like LightStream and SoFi, can provide funding within one business day. Both lenders offer loans of up to $100,000 and neither charges any origination fees. Those fees, which cover the cost of processing a loan application, typically range between 1% to 5% of the loan amount, so avoiding them can save you a significant amount of money.

With a signature loan, you’ll repay the borrowed funds over an agreed period, usually between one and seven years. These loans come with fixed interest rates, so you’ll also have fixed monthly payments no matter what’s going on with interest rates.

Before you get a loan, you need to pick a lender. The most common options are a traditional bank or credit union, or an online lender. Applying for a loan with a financial institution you already do business with can be convenient, but it’s a good idea to shop around and get several offers to find the best deal.

Most lenders will let you prequalify and see estimated terms before you apply. This process only requires a soft credit check, meaning it won’t hit your credit with a hard inquiry. This way, you can compare and choose the best option without any impact on your credit.

After you’ve picked the lender, you’ll fill out and submit an application. Most likely, you’ll need to provide personal information such as your Social Security Number and contact details. To verify your identity, the lender can also ask for identification documents. You might also need to disclose certain financial information, including your monthly income and any debt you have.

When the lender receives your application, they’ll see if you meet their eligibility requirements. At this point, they will likely check your credit and perform a hard inquiry. Having solid credit can help you qualify and get the best terms.

What credit score do you need for a signature loan?

Each lender has their own set of eligibility requirements, including minimum credit score. Some may require good credit (or a FICO score of at least 680), but others work with lower scores too. For instance, Upstart considers factors beyond your credit and can accept applicants with a minimum 300 score. The lender is also open to borrowers who don’t have a sufficient credit history yet.

Note that a signature loan can also help you build credit along the way. Your lender will potentially report your payment history to the credit bureaus which will record it in your credit reports. And if you make each payment on time, you might raise your scores with time. On the other hand, missing payments will lead to the opposite result.

A signature loan can be a quick and convenient solution when you need financing. That said, it’s not always the best choice.

When a signature loan makes sense

A signature loan can be a great financial tool when:

• You’re looking to consolidate high-interest debt. For example, if you have a few credit cards with high balances, a signature loan with a lower APR can save you money.
• You need a few years to repay. If you’re financing a major purchase or life event and need more than two years to repay, a signature loan might provide a term length that works for your budget.
• You want to finance home improvement without using your home equity. A home equity loan will likely offer a lower interest rate, but you’ll be putting your home on the line. A signature loan can be an alternative way to pay for home improvement projects without pledging collateral.

When you might want to avoid signature loans

At the same time, a signature loan isn’t the best solution when:

• You would be adding to an already significant debt. If your current debt load is putting a strain on your finances, taking on another loan will make it harder to stay on top of your repayments.
• A loan doesn’t fit into your monthly budget. Consider whether a new monthly payment is affordable. Stretching yourself thin will only lead to financial stress and possibly even overdue bills.
• A credit card can do the job better. If you have good credit and need a loan for less than two years, chances are, a 0% APR credit card is a better option, either for a large purchase or debt consolidation. These cards waive APR charges on transferred balances and/or purchases for an intro period — which can be as long as 21 months on some cards (just remember that after this intro period expires, you get charged the card’s APR). This way, you’ll save on interest and potential origination fees.

A signature loan is an unsecured personal loan you can use for just about anything. While it can be a good choice, it’s also not a perfect solution in every situation. If you’ve determined it’s the right course of action for you, take the time to compare loan offers from multiple lenders to ensure you’re getting the best deal.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal loan article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best personal loans.

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