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What Is a Signature Loan? Compared to Personal Loans and Revolving Credit

By Janet Schaaf · April 08, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is a Signature Loan? Compared to Personal Loans and Revolving Credit

A signature loan is a type of loan that lenders can make without requiring any collateral. They’ll typically approve the loan based upon a person’s financials and credit scores — plus their signature on loan papers. This is also called an unsecured personal loan, a signature personal loan, good faith loan, or character loan.

In general, there are two broad types of loans — secured and unsecured — and here are more details about each of them, along with pros and cons.

Recommended: Secured vs. Unsecured Personal Loans

What Are Signature Loans?

Signature loans are those approved with just the creditworthiness of the applicant as pledge to repay the loan. There is no collateral for the lender to take if the borrower defaults.

How Do Signature Loans Work?

A signature loan works the same as an unsecured personal loan. The application process is the same, and the funds can be used for a variety of purposes. Since there is no collateral that needs to be appraised, the time between application and funding of a signature loan is typically short, sometimes just a few days.

A Quick Look at Secured Loans

A secured loan must have something put up as collateral against the debt. For a car loan, it’s typically the vehicle that is being purchased with the loan proceeds. For a mortgage loan, it’s typically the house being financed or refinanced. If the borrower defaults on a secured loan, the lender seizes the collateral and the borrower’s credit scores will likely suffer.

Some personal loans are secured, while others are unsecured. Secured personal loans could have a savings account put up as collateral, as just one example. This strategy could be risky for the borrower, though, because it may tie up money meant to be used for living expenses or set aside for emergency circumstances.

A Quick Look at Unsecured Loans

A lender does not require any collateral on a signature personal loan, which is an unsecured personal loan. In many ways, that streamlines the process. But, just as with secured loans, if a borrower defaults on the payments of an unsecured loan, their credit score could be adversely affected, which in turn may make it more challenging to be approved for credit in the future.

Common Reasons to Get a Personal Loan

Personal loans are versatile, with the borrower typically able to use the funds for any personal, family, or household purposes. Some common personal loan uses are:

•   Credit card debt consolidation: Interest rates on credit cards can be quite high, with APRs often between 15% and 20%, so a lower-interest personal loan may be used to combine credit card balances into one loan.

•   Home improvement projects: Depending upon the size of the remodeling project, costs can range from hundreds of dollars to thousands — even tens of thousands. A personal loan can give the borrower the opportunity to conveniently pay for home repairs and upgrades.

•   Medical bills: Unexpected medical expenses can quickly add up, putting a real dent in someone’s budget. Paying for them with a personal loan can often make more sense than using a high-interest credit card for that purpose.

•   Weddings: From engagement rings to ceremonies and receptions, weddings can get expensive — and that doesn’t even include the honeymoon. Couples may decide to look into signature personal loans as a way to cover their expenses.

•   Moving expenses: From moving supplies to renting a truck or hiring movers, the dollars can rack up, with a personal loan being one way to pay for the expenses.

Pros and Cons of Signature Loans

If you need loan funds fast, you don’t have collateral to pledge, or don’t want to tie up assets as collateral, a signature loan might be the right choice for you. Here are some of the pros and cons of signature loans:

Pros of Signature Loans

•   Funds disbursement is typically quick.

•   There is no collateral requirement.

•   Generally a wide range of loan amounts available.

Cons of Signature Loans

•   Lenders may see unsecured signature loans as riskier than collateralized personal loans, so interest rates may be higher than secured loans.

•   Some lenders’ minimum loan amounts may be higher than some people need.

•   Short-term signature loans can be payday loans, which typically have extremely high interest rates and fees.

Pros of Signature Loans

Cons of Signature Loans

Typically quick funds disbursement, sometimes within a few days. Payday loans may be disguised as typical signature loans, but they have prohibitively high interest rates and fees.
A wide range of loan amounts is typically available. Some lenders may not be the best fit for applicants seeking small loan amounts.
There is no collateral requirement. Lenders may offer higher interest rates on unsecured signature loans than secured loans if they perceive them as risker.

Signature Loans vs Personal Loans

A signature loan is a type of personal loan, specifically an unsecured personal loan. Each is approved based on the applicant’s creditworthiness, without collateral being a consideration. (A secured personal loan, however, does differ from a signature loan in that there is collateral backing a secured personal loan.)

Online signature loan lenders are widely available, making it easy to compare lenders. Once approved for a signature loan, funds may be disbursed quickly, sometimes in just a few days. There are few restrictions on the use of the signature loan funds.

Some people may use a signature loan to build credit history, but not all signature loans are the right fit for that. Short-term signature loans that are advertised as not requiring a credit check may have more in common with payday loans. In addition to not running a credit check, the lender may not report payments to the credit bureaus. So any diligence in making on-time payments won’t typically have an effect on a person’s credit report in that situation.

With an ease of finding lending options and relatively quick disbursement of a signature loan, it may be easy for some people to accrue debt without considering the wisdom of that decision, formulating a repayment plan, or the consequences if the loan is not repaid.

Signature Loans vs Revolving Credit

Signature loans are typically installment loans, with a lump sum loan amount repaid in equal installments over a set amount of time. Revolving credit, like a credit card or line of credit, has an upper credit limit, but can be accessed, repaid, and accessed again as long as the terms of the revolving credit limit are not violated.

Signature Loans

Revolving Credit

Funds disbursed as a lump sum. Credit limit that can be accessed repeatedly.
Payments are equal over a set amount of time. Payments may vary each billing period.
If more funds are needed, a new loan must be applied for. Funds can be used over and over again as long as the borrower stays within the credit limit.
Signature loans have a payment end date. Revolving credit is a cycle of borrowing money and repaying the debt.

What Are Signature Loans Commonly Used for?

There are few restrictions on the use of signature loan funds. One common use of a signature loan is to consolidate other, high-interest debt with the goal of either getting a lower interest rate or having a fixed payment end date.

Signature loan funds are also commonly used to pay for wedding expenses, medical expenses, or home renovation or repairs.

Advantages and Disadvantages of Signature Loans Online

Signature personal loans are widely available online and can be good choices for people who don’t mind not having a physical bank branch to drive to for transactions.

Advantages of signature loans online include:

•   Competitive rates: Online lenders can often offer competitive rates because they don’t have the expenses involved in maintaining physical branches. When shopping around for a signature loan online, you may want to see what rates are offered and also check to see what fees are charged. You can use this information to decide which loan you would like.

•   Convenience: It can often be quick and easy to apply online (no driving, no appointments needed), and online lenders often offer streamlined processes which may result in quicker approval times.

•   Different criteria: Some online lenders might focus more significantly on a borrower’s cash flow and employment history, perhaps allowing for a bit more wiggle room on credit scores than a traditional bank would be willing to give.

•   Online lenders may also offer more perks to their customers than a traditional bank offers.

There are, however, disadvantages to working with an online lender vs. a bank you have an established relationship with.

•   As an established customer of a traditional bank, you may qualify for a reduced interest rate, depending on your creditworthiness. This may not be something online lenders offer, as they may not have an established business relationship with you.

•   Security may be a concern for some people when using an online lender. Being wary of unsolicited offers; only entering financial information on official, secure websites; and researching the lender’s reputation are all smart steps to take before giving the lender personal information.

•   There is likely no face-to-face interaction like there typically is with a brick-and-mortar financial institution. If this is something you value and desire in a lender, the online loan option may not be for you.

•   You may be contacted repeatedly by lenders you’ve received information from, even if you were only comparing lenders. This can be an unwelcome deluge of emails, postal mail, or even phone calls. While you can request to be removed from a company’s contact list, that process can take time and may be frustrating.

Application and Approval Processes

Similar to an unsecured personal loan, a signature loan’s application and approval process is generally uncomplicated.

Things To Look Out for When Getting a Signature Loan

It’s a good idea to review your credit report before shopping around for a loan. A free annual credit report can be requested from each of the three major credit reporting agencies. If there are errors or inaccuracies on your credit report, you can try to correct them before any lenders start the loan qualification process.

Credit reports don’t include a person’s credit score . However, you may be able to access that information through your bank, credit card issuer, or a reliable website at no charge.

When you’re satisfied that your credit report is accurate, you may want to compare lenders and consider getting pre-qualified. Many lenders will do a soft credit check at that point, which will not affect your credit score. You’ll be able to compare interest rates and terms from multiple lenders to find the one that works best for your unique financial situation.

By getting pre-qualified, a borrower could get a good sense of how much might be available to borrow, what the interest rate would likely be, and how that translates into a monthly payment.

Before applying, it’s important to know the amount that’s needed to borrow, choosing an amount that would cover the expenses at hand while trying to avoid borrowing more than necessary. Interest will be charged on the amount borrowed, not only the amount used.

Comparing pre-qualification quotes from different lenders: While comparing interest rates and payments, it can also make sense to find out if there are any hidden fees: origination fees, late fees, prepayment fees, or others.

Typical Signature Loan Requirements

Each lender has unique application and approval requirements but may commonly ask for the applicant’s name, proof of address, photo ID, and proof of employment and income. After the application has been submitted, a lender will conduct a hard credit check to review the applicant’s credit report.

Besides checking credit scores, lenders like to see steady employment and enough income to meet expenses, including this new loan. Sometimes, having a cosigner or co-borrower might improve the chances of loan approval or help to secure a more favorable interest rate.

Getting a Personal Loan With SoFi

SoFi offers low rates and no fees on unsecured personal loans. There is a simple online application to fill out, with live customer support available seven days a week.

Plus, SoFi’s Unemployment Protection Program is a benefit available to eligible SoFi members who have lost a job through no fault of their own.

Find your personal loan rate in 1 minute.

FAQ

Are signature loans easy to get?

Signature loans typically have fewer qualification requirements than a secured loan, but approval will depend on the applicant’s overall creditworthiness.

Do you need a down payment for a signature loan?

No down payment is necessary for a signature loan.

What is the maximum that can be borrowed with a signature loan?

Lending limits will vary with each lender.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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