Signature Loans

A signature loan is an unsecured debt facility that relies only on the borrower’s good character and their signature on a promissory note. Though a co-signer may be added to the loan, no other collateral is required and the borrower can use the loan for any purpose they choose including home improvements and other larger purchases or expenditures.

Signature loan interest rates have fallen over the years and maximum loan values have increased. But, interest rates are generally still higher than other types of loans given the lack of any physical collateral. Borrowers with great credit and higher incomes are more likely to be approved for this type of loan.

Signature loans are more difficult to obtain given that there is no collateral attached to the debt. The lender relies on your credit score and good character to determine whether or not to issue the loan. The lender may also consider the reason for the loan, which may include:

  • Home repairs, renovations, or other improvements
  • A wedding or honeymoon
  • A vacation or holiday
  • Major purchases such as large appliances or a home theater system
  • Unforeseen expenses

Signature rates are normally issued with a fixed interest rate. Given that you generally need to have good credit to be approved, it’s likely that the rate will be reasonably competitive yet still higher than if you collateralized the debt. Signature loan terms generally range from 2-5 years, depending on the size of the loan needed. It is very rare that the term will be more than 5 years however you may be able to refinance the debt if needed.

Loan amounts are based on debt to income ratio, credit score, need, and your good character. For the most part, loan values are up to $20,000, but it is likely that you can request up to $50,000 if you have the income to support it. It is important that you shop around if you plan to take out a signature loan. As with every type of loan these days, there are all sorts of lenders trying to get their money in front of those with a strong credit score, low debt to income ratio, stable employment and income, and proven character when it comes to financial management. It is easy to say yes to the first preapproval that you receive. But, if you shop around, and even negotiate with multiple lenders, you could end up closing on the loan at a very good Annual Percentage Rate (APR).

In the event you have good or average credit, you may need a co-signer or co-borrower to be approved for the loan. It is important that you choose a co-signer who you know well, has good credit and stable income, and is of equally strong character of yourself. In the event you can’t make a payment, your co-borrower needs to be able to make the monthly payment. If you miss a payment, the lender will likely pursue collection against the loan account and this could result in legal issues, collector actions, garnishments, and negative credit score impacts. Both you and your co-signer should keep a copy of the loan agreement for reference and you should communicate on a monthly basis after the monthly loan payment has been deposited. Never co-sign a loan for someone you don’t know or know to have questionable character. You could be on the hook for their debt in the event they decide to stop paying off the loan.

Prior to approaching your bank or another lender for a signature loan, you should check your credit score to ensure you have good or average credit score. A good FICO score is generally over 650, and a great score is well into the 700s. If your score is below 650, you should consider lining up a co-signer or finding a different type of loan. Remember, the lower your credit score is, the higher your interest rate will be and you may be denied the loan altogether. The best sources for a signature loan are your primary bank, a regional bank, a Federal or non-Federal credit union, an online lender, or a Peer to Peer (P2P) lending platform. Your primary bank, a regional bank, or a credit union will offer the best rates. But, if you have a lower credit score you may only have the options of a higher interest rate online lender or P2P-issued loan. With online and P2P loans, it is likely that you’ll have to clearly outline what the loan will be used for. In many instances, this will be the determining factor of whether or not you are issued a loan as these services will not lend you money for frivolous purchases.

P2P-issued loans are worth special mentioning given that they’re considered an emerging loan market. The concept is an online platform that brings together people with money to lend with those who need to a loan. Though there are no direct interactions between the lender and the borrower, and the loan is administered by the online platform, you’re essentially able to borrow from private citizens. However, you should be aware that the interest rates for these loans is much higher than a bank or credit union, especially if you have a low credit score.

As with any new debt, it is important to decide whether or not a new signature loan is the right choice for you. Do you really have to make the purchase you’re about to make? Is a vacation or holiday the best timing for you personally and financially right now? Maybe it’s better to start that renovation you’ve been dreaming about in a few months when you have some surplus cash? This type of questioning is called "critical thinking" and it demonstrates a certain amount of maturity in your decision-making process as a whole (this could also be defined as "adulting"). All too often, we are tempted to make purchases or take extravagant vacations by advertising or social pressure. On Instagram and other social media channels, we see everyone else having fun, driving the newest car, riding the latest surfboard, or using the highest end appliances. Our current social world is designed to play into our whims and convince of us to purchase and do things we wouldn’t normally do. So, financial control and responsibility is a personal choice. You have to consciously choose what is really important to you and direct your efforts towards achieving your goals, and not the goals or marketing gimmicks of others.

Tip 1: Break out the good ol’ notebook and pencil (or, the iPad or "liquid crystal paper" for you techno geeks). Write the title of your purchase or reason for taking out a signature loan at the top. Created two columns, with “Pros” on the left and “Cons” on the right. In the Pros column, list all of the benefits for the reason you’re taking out the signature loan. These reasons could include that you’ll have a new kitchen to make meals and spend time in with your family, that you’ll be well-rested after a much needed vacation, or that you’ll have the best memories (and, Instagram posts) from taking that dream honeymoon. In the Cons column, list all of the negative aspects of closing on the loan. These could include the monthly payment amount, the interest charges, the fees, how many months you’ll be in debt for, whether or not you’ll need to have a co-signer, and other reasons that you truly don’t need a loan. The simplest approach to this decision-making exercise is looking at the two columns and determining which one has more entries. If you have more Cons than Pros, don't take out the loan. And, vice versa. However, another way of running this exercise is to prioritize your entries from 1-10 or more. If you take this quantitative approach to measuring your qualitative assessment of your priorities, you might find that the same table will bring you to a decision of taking out a loan. The short story: Live in reality when it comes to what debts you incur. Buyer’s regret or remorse is never fun and you don’t want to look back at your loan experience thinking of how you could have made better choices.