What Is a Signature Loan?

Some loans require you to use a piece of property as collateral or security for the loan. If financial hardship causes you to default on this kind of loan, your collateral will be taken as payment. There is a different kind of loan available that does not require you to put up property as security for the loan. These loans are known as signature loans.

Signature loans simply require your signature as a guarantee that you will repay the loan, thus the name signature loan. Other names for a signature loan are unsecured loan and personal loan.

To determine your eligibility for a signature loan, most lenders use your credit history and debt-to-income ratio. Your debt-to-income ratio is the amount of debt you have versus your income. Lower debt-to-income ratios are more favorable by lenders. Since there is no type of collateral backing the loan, the approval criteria are sometimes more stringent. Many lenders have a minimum credit score and income level required for applicants.

There are some lenders that specialize in lending to consumers with less than ideal credit. These types of signature loans usually come with higher interest rates than those offered to applicants with better credit. Another alternative for signature loan seekers with a low credit score is to have someone with better credit co-sign the loan. Having a more credible applicant sign the loan along with you, gives the bank additional guarantee that the loan will be repaid. A co-signer can also help you get a lower interest rate for your loan.

Unless the lender specifically states you cannot use the signature loan in a certain way, then there are no limits on how you can use the loan once you’ve been approved. A small business start-up, college education, or home improvements are just a few of the ways you might use your loan.

Even if the lender doesn’t request it, you should apply for the loan with a use in mind. To keep your debt level low, you should only take out as much of a loan as you need.

Defaulting on a signature loan can be detrimental to your credit, making it hard for you to get additional loans in the future. Since there is no collateral backing the loan, you are obligated to pay it, even if you run into financial trouble. If, for some reason, you are no longer able to make your payments as agreed, you should alert your lender as soon as possible. The lender may have a hardship program that can help until you are once again able to make payments.