A signature loan, is a type of loan that doesn’t require collateral to secure the debt. Collateral is something of value, like a home or auto.  The borrowers’ signature is a legal promise to pay the loan back.  Signature loans are also referred to as “good faith” or “character” loans.  A signature loan may or may not be the right choice for some situations, so consider all of the details before deciding to take out a signature loan. 


How They Work:  Because there is no collateral used to get a signature loan, your credit history will be reviewed very closely.  The loan will be granted based on your ability to pay the loan back.  Lenders will carefully look at credit scores and debt-to-income ratios to determine how much and what interest rates and terms are given to the borrower. Signature loans often have a quick approval process which means you can get your loan funded quickly, sometimes the same day. 


How to Get a Signature Loan:  The process for getting a signature loan is often quick and simple.  However, it’s important that you take time to understand the fine print on the loan and make sure it’s the right type of loan for you.  Compare offers; don’t assume that all signature loans are the same.  Choose the loan that’s right for you after evaluating the interest rates, terms, and any fees, and make sure the loan meets your financial goals.  Most lenders will require some documents, so have them ready.  They often include tax returns, paystubs or proof of income, bank statements, information on any other debt that you carry like credit cards and student loans.  Signature loan applications are simple, you can usually find them on the lenders website or walk in to any institution and complete one.  Once you’ve been approved for a signature loan, they are often funded very quickly.  Lenders can typically deposit the funds directly into your account.


Uses for a Signature Loan:  Signature loan funds can be used for just about anything.  A few examples include large purchases, debt consolidation, medical expenses, home repairs, weddings or vacations. Signature loans can make sense to consolidate other debts in cases where you can reduce the interest being paid.  Signature loans can be used for almost anything, but it’s recommended that you save money to pay for luxuries and only take out a loan when absolutely necessary.


How Much Can Be Borrowed:  At WesTex Federal Credit Union, as little as $500 and up to as much as $10,000.  Each financial institution has different loan limits; your credit history and your income will determine how much is approved.  Individuals with higher credit scores may be approved for higher amounts. Apply Today


What Interest Rates Can Be Expected:  Your credit score will affect the interest rate for a signature loan.  Interest rates are often lower than credit cards, but can be higher than loans that are secured with collateral.  You will generally see rates anywhere from 4% to 18%, sometimes higher. These loans most often have a fixed interest rates which gives you consistent monthly payments, and the loans have repayment terms that can be several years, commonly 1 – 5 years.  Some lenders may offer longer terms.


What if You Don’t Qualify:  Signature loans are approved based on your credit history and income.  There’s usually a lender out there for everyone, but interest rates or other fees may make the loan very costly.  It may be better for you to improve your credit score, first.  You can take steps to improve your credit score if you don’t need the cash right away.  Review your credit score every year at annualcreditreport.com.  Be sure to report and correct anything on the report that is incorrect, and pay down some balances on other debts if you can.  You could also pledge some collateral – whatever collateral you pledge is at risk if you default on the loan.  However, lenders may consider vehicles, bank and investment accounts etc. as a means of securing the loan.  You could get a co-signer, using a cosigner who has good credit and employment history makes the loan less risky for the lender.  If you don’t pay, the cosigner becomes responsible for paying the loan back. 


Keep an Eye Out for Fees:  Some institutions may have origination fees, if you’re considering a signature loan, be sure to ask what the fees are.  Additionally, some institutions may have penalties for paying the loan off early.  If you’re late making payments on a signature loan the late payment fee can be costly and negatively impact your credit score.  Lenders can get a court judgement if you default on the loan, if the court finds in favor of the lender your assets and future earnings can be at risk and in some cases the court can garnish your salary, place a lien on your home or order a levy against your bank account.


Bottom Line:  Signature loans aren’t a good fit for every financial situation, but in some cases a signature loan makes more sense than credit cards or other high interest rate loans.  As with any loan, be sure you understand all the terms and conditions before you sign. A signature loan may be a good idea if you can repay the loan and if the terms are better than other options.