Key takeaways
- Signature loans provide quick access to funds without the need for collateral.
- You make fixed monthly payments over a set period to repay the money borrowed.
- Borrowers with poor credit can still qualify but with higher interest rates and stricter repayment terms.
A signature loan, also known as a good faith or character loan, is a personal loan that requires only the borrower’s signature as a promise to repay. It is an unsecured loan that does not require collateral but instead depends on your creditworthiness.
This type of borrowing can be an attractive option for those in need of quick funds who don’t want to risk losing assets. But they’re not for everyone. Securing a signature loan for bad credit can be challenging due to the lender’s reliance on your credit history. If you do get one – it is possible – you’ll probably be stuck with high interest rates and extra fees.
Despite this, signature loans remain a valuable tool for anyone seeking flexible borrowing options without the need for collateral.
Jump to:
- How does a signature loan work?
- Is a signature loan different from a personal loan?
- What credit score do you need for a signature loan?
- Pros and cons of signature loans
- How much can you borrow on a signature loan?
- Where can you get a signature loan?
- Are signature loans a good idea?
- Can you get a signature loan with bad credit?
- A signature loan is a short-term financial solution
- Frequently asked questions
- Bottom line
How does a signature loan work?
A signature loan is an type of unsecured personal loan where your signature serves as a legal promise to repay the funds.
To determine if they’ll lend you money, lenders rely heavily on your:
- Credit history
- Income
- Credit score
- Debt-to-income ratio
Once the application is approved, you get a lump sum of cash. You repay the cash plus interest and fees at a fixed rate over a fixed term. The repayment term can be as little as twelve months to over fifteen years. The set repayment term means you will make the same monthly payment over the life of the loan.
What interest rate you qualify for, and the fees charged depend on the lender and your credit history. A signature loan for bad credit will come with a higher interest rate and additional fees. It’s not uncommon to find an annual percentage rate (APR) as high as 36% when you have a very low credit score. The higher interest rate helps mitigate the risk taken on by lenders. While the APR may be high, it is still lower and easier to repay than many short-term borrowing options.
Is a signature loan different from a personal loan?
It actually a type of personal loan. Other types include:
- Unsecured loans
- Secured loans
- Debt consolidation loans
- Variable rate loans
- Installment loans
Signature loans are unsecured personal loans relying solely on your creditworthiness.
Secured loans require collateral, such as a car or savings account, which the lender can claim if the borrower defaults. This collateral often results in lower interest rates and makes them easier to be approved for. Unsecured loans tend to have higher interest rates due to the increased risk for lenders. Even though the costs can be higher, they are a convenient option if you prefer not to pledge assets as collateral.
Signature loans are a form of installment loan. They come with a fixed annual percentage rate, terms, and set monthly payments. You can use them to finance major life events, home improvement projects, or combine debts, whatever you prefer.
What credit score do you need for a signature loan?
You generally need a good credit score to be approved. This would be a FICO score of 670 or higher or a VantageScore of at least 661. The higher your score, the lower the risk you’re considered. This, in turn, results in more favorable terms and lower interest rates.
Obtaining a signature loan with bad credit is still possible. Some lenders specialize in lending to borrowers with poor scores. These lenders typically charge higher interest rates and have stricter conditions to offset the increased risk.
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Pros and cons of signature loans
Signature loans are a good option for some borrowers, but they’re not for everyone.
Pros:
- No Collateral Needed: They do not require any assets, making them accessible to those without significant property.
- Quick Approval: The approval and disbursement of funds can happen the same business day.
- Flexible Use: Borrowers can use the funds for various purposes, such as to consolidate debt or pay medical bills.
- Build Credit: If your lender reports payments, they can help improve your score with on time payments.
Cons:
- Higher Interest Rates: They generally have higher interest rates, especially if you have a low score.
- Credit Score Dependence: Approval and favorable terms heavily depend on your creditworthiness, making it harder for those with poor scores to qualify.
- Potential Fees: Some lenders charge fees that increase the cost of borrowing. Potential fees include origination fees, late fees, and prepayment penalties.
- Damage Credit Score: Missing payments can hurt your score making it harder to borrow money in the future.
How much can you borrow on a signature loan?
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How much you can borrow varies widely depending on the lender, your credit score, and your monthly income. Typically, amounts range from $1,000 to $50,000. Lenders assess your income, score, and debt-to-income ratio to determine the amount you qualify for.
Where can you get a signature loan?
Banks
Traditional banks can be a good place to start if you have solid credit. Visit a bank you already have relationship with as they may be more inclined to lend you money at a good rate. Note that most banks have strict lending criteria that not everyone meets.
Credit unions
Credit unions are member-owned financial institutions. They often offer more favorable terms and flexible lending criteria. Interest rates are capped at 18%, making them a more affordable option. You will likely have to become a member of your local credit union to qualify, but most credit unions have have broad eligibility criteria.
Online lenders
Online lenders tend to consider applicants with lower scores. Online marketplaces are particularly helpful as they let you prequalify with multiple lenders by submitting a single application. You get to compare amounts, terms, interest rates, and fees then apply with the online lender who offers you the best deal.
Are signature loans a good idea?
Whether it’s a good idea depends on your credit, financial position, and needs. If you have a higher credit score, can secure a low-interest rate, and can afford the monthly payments, then it may be worth it. Use it to consolidate high-interest debt, cover unexpected expenses, or fund large purchases and pay it back as agreed.
If you have a poor score or can’t afford the monthly installments, then it can hurt more than help. You may do more damage to your score and end up in debt.
Before you borrow money, consider do you really need the funds? How much it will cost in total? Can you afford to repay the funds as agreed?
Can you get a signature loan with bad credit?
Yes, it is possible to get a signature loan with bad credit. There are lenders who specialize in offering signature loans for bad credit. These lenders consider factors beyond credit scores, such as income, employment history, and overall financial stability. The catch is you will be matched with higher APRs, possibly as high as 36%, making them an expensive borrowing option.
A better option may be to add a cosigner. Applying with a friend or family member lessens the risk for the lender, making them more inclined to offer you a lower interest rate.
Need to borrow money but have bad credit?
A signature loan is a short-term financial solution
A signature loan is designed as a short-term financial solution to address immediate monetary needs. They offer quick access to funds, making them ideal for emergencies, unexpected expenses, or short-term financial gaps.
While the fast funding makes them appealing, it’s important to remember that they come with higher interest rates, especially for those with less-than-perfect credit. Always compare offers and make sure you can repay the money before you sign an agreement.
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Frequently asked questions
Bottom line
Signature loans can be a solution when you need money quickly. They offer fast funding without the need for collateral, so you won’t have to risk losing a valuable asset. You can even get a poor credit signature loan, but be careful with the interest rate and fees offered.
Compare lenders to get the best deal. Always make sure you have the income to make the monthly payments. Consider all borrowing options to make sound financial decisions. Otherwise, your short-term financial solution will do more harm than good.
