Signature loans are for covering low-value expenses, but they could have a relatively high interest rate. Find out whether they're right for you.
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A signature loan is an unsecured personal loan. That means there’s nothing backing it up except the lender’s trust in your ability to pay it back. When you take out a signature loan, all you need is a credit check and a statement about your income, plus your signature.
Signature loans tend to be for relatively low values. Depending on the lender, signature loan amounts can range from $500 to $15,000, and some signature loans offered may go up to $20,000 or even $50,000 and higher.
These types of loans usually have comparatively higher interest rates, typically expressed as an annual percentage rate, or APR. Signature loan APRs can range from as low as 6.25% to 9.65% per year to as high as 18% to 20% or higher per year.
Compared to other types of loans, like mortgages or student loans, signature loans also have a short repayment term, which is the amount of time you have to pay back the loan. Signature loans usually have 12- to 60-month terms.
If you need cash fast, signature loans may be easier to qualify for than other types of loans. That’s because it’s an unsecured loan. You don’t need to put up an expensive asset like your house or car as collateral. (A secured loan is backed up by collateral—if you don’t pay it back, the lender can seize the secured asset.)
But you do need to meet the following requirements:
You must have at least fair credit, which corresponds to a credit score of 580 to 669 on FICO’s model and a 601 to 660 on VantageScore’s.
You must have an acceptable debt-to-income ratio, which is a measurement of how much you owe across all forms of debt you have compared to how much money you earn. While lender requirements for signature loans vary, the lower your debt-to-income ratio, the more favorable your loan terms will be.
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If you miss a payment on a signature loan, you may charged fees that you’ll have to pay back in addition to the interest. Your credit could also be damaged, resulting in a lower credit score.
But if you miss so many payments that the loan goes into delinquency and default, the unpaid debt, including interest and fees, will go to collections. Your credit will take an even harder hit, possibly dropping hundreds of points.
The collection agency who owns your debt will take you to court if you continue being in default, and the court could order that you pay back the loan balance directly from your wages. This is called wage garnishment.
You can get a signature loan from many banks or credit unions, although major financial institutions typically call them “personal loans.” (Personal loans are a type of signature loan, which we’ll describe in the next section.) Credit unions may offer lower APRs than banks, but you may need to meet certain qualifications to become a member.
If you don’t have a bank or credit union nearby, you can also get a signature loan from a lending company. Be sure to compare rates from lending companies to those offered by banks and credit unions to make sure you’re getting the best deal.
Online loans are also available. When getting an online signature loan, you fill out the application online and, when you’re approved, the money is transferred electronically to the bank account you enter.
However, no matter where you get your loan, it’s possible to be approved within just minutes or hours.
A signature loan is a broad category containing several different types of unsecured loans. Some of the most common types of signature loans include the following.
Personal loans are for covering large expenses, including expensive items you want to buy, repairs you want to make, or unexpected costs like emergency medical bills. They are also “installment loans,” meaning that you must make monthly payments to avoid default.
Some personal loans have a prepayment penalty. Essentially, if you pay the loan off too early, you might be charged a fee.
When shopping for a personal loan, look not just at the interest rate but also the loan term. Taking out a loan with a lower APR but a longer term could result in you paying more interest than on a similarly sized loan with higher APR and a shorter term.
Payday loans are a type of same-day signature loan with very few requirements for approval. To get one, you need to find a payday-loan lender and show that you have steady employment.
Payday loans are virtually the only type of signature loan you can get with no credit or bad credit.
However, we caution against taking out payday loans unless you have an extreme emergency and no other resources to draw from. Payday loans have an average interest rate of 400%, and they can frequently trap borrowers in a never-ending cycle of loan payments. Such loans may create a hole too deep for some borrowers to dig themselves out.
If you own a small business, you may be able to get a small-business loan. Check with your bank or credit union or with online lenders for more information. These have similar terms and APRs as personal loans.
While some business loans are unsecured signature loans, other small-business loans must be secured by collateral. That will require you to put up some form of collateral related to your business, including physical assets.
Some kinds of debt consolidation loans are considered signature loans.
A debt consolidation loan pays off your other loans and replaces them with one large loan for the sum of the paid-off ones. This will help you manage payments (you’ll make just one per installment) and may even get you a lower interest rate.
Debt consolidation loans may be a little more complicated than personal loans, so you might need to provide more than just a signature.
Signature loans are not for everyone. While you can get a very reasonable interest rate, in some cases you might find that other loans are more financially advantageous. Some of these options allow you to get a larger loan and others come with much lower interest.
They include the following:
Home equity loans and HELOCs allow you to convert the equity in your home to cash. Equity is the home’s market value in relation to how much you owe on your mortgage. Home equity loans and HELOCs are often referred to a “second mortgage”.
Interest rates on a HELOC or home equity loan may be lower than those on an unsecured personal loan. However, like mortgages, these types of debt are secured by your home, and you risk losing the home if you default.
Some credit card companies offer a promotion for the first 12 to 18 months you have the card during which you pay no interest on late payments. If you need to cover a big expense and don’t have cash, the credit card can buy you some time.
With a 0% APR credit card, as long as you make at least the minimum payment each month then you’ll never owe extra interest.
However, if you have an unpaid balance at the end of the promotional period, you’ll be charged a very high interest rate. Normal credit card APRs are often as high as 25% to 27%.
For some big purchases, a secured loan may not only be your best option but also your only option. You can’t get a signature loan to buy a house, for example, and you wouldn’t want to, anyway.
Mortgage rates are far lower than typical signature loan rates across similar borrower profiles. Average mortgage rates for a 30-year, fixed-rate mortgage hover between 4.0% and 4.5% APR.
The same is true for auto loans. Your auto loan is secured by your car; if you default on the loan, the lender can seize the car to pay off the debt you owe.
As with mortgages, auto loan rates are much lower than signature loan rates if all else about the borrower is equal. Car loan rates are typically less than 4% APR.
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