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
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
• Credit card debt consolidation: Interest rates on credit cards can be quite high, with APRs often between 15% and 20%, so many people take out lower-interest personal loans 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 sure rack up, with a personal loan being one way to pay for the expenses.
Pros and Cons of Signature Loans
In addition to the versatility of a signature loan, the funds for this type of loan may be dispersed more quickly than those of a secured loan, in part because of the extra documentation involved in secured loans.
For a refinance of a car, for example, required documentation could include proof of title and a valuation of the vehicle. For a home loan, an appraisal, title search, home inspection, or other documentation might be required by the lender.
Borrowers who have credit scores on the high end of the “excellent” range may be approved for favorable rates on their signature personal loans. Plus, with an unsecured loan, there is nothing tangible a lender can take from the borrower if their payments fall too far behind, although doing so may have an adverse effect on the borrower’s credit rating.
There are also some disadvantages to unsecured loans to consider. For example, because they are riskier for lenders, they can come with higher rates, especially for people who have credit scores on the lower end of the range.
Plus, if a borrower defaults on the loan, it can have a negative impact on their credit score. This, of course, is also true with secured loans.
Lenders sometimes advertise “Signature Loan: No Credit Check!” Those are typically payday loans by another name, or another form of a short-term loan. They often come with high-interest rates with very short terms—perhaps as short as a few weeks. Plus, there are often hefty fees attached to the loan, such as late fees and insufficient fund fees, among others.
Advantages and Disadvantages of Signature Loans Online
Signature personal loans are 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 and already consider you a valued customer.
• 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
Before applying, it’s important to know the amount that’s needed to borrow, choosing an amount that would cover the expenses at hand (which helps to avoid the use of high-interest credit cards) while trying to avoid borrowing more than necessary. Interest will be charged on the amount borrowed, not only the amount used.
Approval for a personal loan can hinge on different factors, so it can make sense to take a few steps early in the process:
• Checking credit scores: A free annual credit report can be requested from each of the three major credit reporting agencies.
◦ In general, lenders may consider a score of 670 or above to be solid. When looking specifically at a FICO® Score (one of the credit scores often used by lenders), 740 is “very good” and above 800 is “exceptional.”
◦ If a score isn’t ideal, it can make sense to look for errors and report any found to the credit bureau.
• Considering getting pre-qualified: Many lenders will allow a quick credit check to take place to see if approval is likely.
◦ 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.
◦ If a lender does what’s called a soft credit check, then there would not be an impact on the borrower’s credit scores.
• 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. Include that information in any lender comparisons made.
Next up: actually applying for the signature personal loan. Each lender has unique requirements but may commonly ask for name, address, phone numbers, proof of address, a photo ID, and proof of employment and income. This step is when 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 co-signer/co-borrower might improve the chances of loan approval or help to secure a more favorable interest rate.
SoFi offers low rates on unsecured personal loans with no fees. 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 perk available to eligible SoFi members who have lost a job through no fault of their own. Career coaching is another perk, available to all SoFi members.
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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. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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