What Is a Signature Loan and How Does It Work? Your Guide

A signature loan is a type of personal loan that doesn't require collateral. With this type of loan, you simply sign your name on the loan agreement as a promise to repay the borrowed money. This doesn't mean just anyone can get approved — the lender decides whether to trust you based on your credit score and income, not on assets such as a house or a savings account.

Here’s how you can qualify for a signature loan and how they work.

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How Does a Signature Loan Work?

A signature loan is an unsecured personal loan that requires no collateral. Instead, you sign a loan agreement promising that you'll repay the amount with interest. Because the loan has no collateral, it may be seen as higher risk to lenders.

Here are some key points to keep in mind:

• Installment structure: With a signature loan, you borrow a fixed amount of money from a bank, credit union or online lender. Then, you'll repay the loan over time with fixed monthly payments.

• Interest rates: Your interest rate will depend on your credit score. Higher credit scores will garner a more favorable interest rate.

• Repayment schedule: Your repayment schedule is fixed. These payments will include principal and interest.

How Much Can You Borrow With a Signature Loan?

You can typically borrow from $1,000 to $50,000 with a signature loan. With some lenders, you may be able to secure up to $100,000.

Here are the factors that can impact the amount:

• Credit score: Credit scores above 740 typically qualify for lower interest rates, while those between 580 and 669 will likely pay more in interest to secure their loan.

• Income: Lenders want to see consistent, stable income to ensure you have cash flow to repay the loan.

• DTI: Your debt-to-income (DTI) ratio is important. Typically, lenders want to see a DTI of 36% or lower.

What Do You Need To Qualify for a Signature Loan?

To qualify for a signature loan, lenders need to know that you’re capable of repaying the loan. Since there is no collateral securing the loan, lenders will look at your income and the amount of debt you’re carrying by evaluating your DTI ratio.

• DTI = total monthly debt payments divided by gross monthly income

Ideally, the DTI percentage lenders like to see is below 36%.

Requirements Checklist

Here’s the eligibility criteria of a signature loan:

• You must be 18 years old.

• You must be a U.S. citizen or permanent resident with a valid Social Security number.

• You’ll need a credit score of at least 580.

Required Documents

Here are the documents you likely will need:

• Proof of identity with a government-issued ID

• Proof of income — pay stubs or W-2s

• Access to bank history

Can a Co-Signer Help?

A co-signer can help you, especially if your credit score is low. Adding a co-signer with a high credit score can help you get approved and secure a lower interest rate.

This may also be the difference between being approved for a loan and being declined.

How Do You Get a Signature Loan?

You can follow these steps to apply for and get a signature loan:

1. Check your credit score: You should know your score before applying. It typically takes 10 to 15 minutes to check your credit score for free online.

2. Calculate your DTI: Add up your monthly debt and divide it by your gross monthly income.

3. Compare lenders and prequalify: Some lenders allow you to prequalify for a personal loan by sharing some financial information. This can increase your approval odds before a hard credit inquiry and takes only 10 to 15 minutes to complete.

4. Gather documents and apply: You can do this either online or in-branch at brick-and-mortar lender locations.

5. Wait for approval: A signature loan often provides same-day credit decisions for many applicants.

6. Accept and fund: Review your loan agreement, sign it and your funds may even be deposited into your account the same day.

Signature Loan vs. Other Financing Options

There are several types of personal loans and other financing options available. Here's how a signature loan compares:

Pros and Cons of Signature Loans

It's important to know the pros and cons of signature loans before you apply so you know the potential benefits and risks.

Pros

• No collateral needed

• Fast approval and funding

• Fixed payments make for easy budgeting

Cons

• Higher interest for low credit scores

• Can hurt your credit if you miss payments

• May have fees, such as origination or for late payments

What Does a Signature Loan Cost?

If you have relatively good credit — a score of 720 or higher — here’s how much it may cost you for a $10,000 loan. The APR for this example is 11.99% and the term is 36 months.

• Monthly payment: $332.11

• Total interest paid: $1,955.96

• Total repayment amount: $11,955.96

Is a Signature Loan Right for You?

Not sure if a signature loan makes sense? Here's how to evaluate if it's a good fit.

Good fit if:

• You need cash fast for expenses like a car repair.

• You have strong credit and a steady income.

• You want predictable monthly payments.

Not ideal if:

• You have bad credit.

• You're unsure you can afford to make the payments.

• You're considering a secured loan for lower rates.

Key Terms

• Signature Loan: An unsecured personal loan backed only by the borrower's written promise to repay — no collateral required. Approval is based on credit score, income and DTI.

• Unsecured Loan: A loan not backed by collateral. Because no asset secures the debt, lenders rely heavily on your creditworthiness when deciding whether to approve you.

• Collateral: An asset — such as a home or car — pledged to secure a loan. Signature loans don't require collateral, which makes them higher-risk for lenders.

• Debt-to-Income Ratio (DTI): The percentage of your gross monthly income that goes toward monthly debt payments. Most signature loan lenders prefer a DTI of 36% or lower.

• Credit Score: A three-digit number that reflects your creditworthiness based on payment history, debt levels and other factors. Scores of 580 or higher are typically required, with a score of at least 740 and higher unlocking the lowest rates.

• Co-Signer: A person who agrees to share legal responsibility for repaying a loan. Adding a co-signer with strong credit can improve your odds of approval and lower your interest rate.

• Annual Percentage Rate (APR): The yearly cost of borrowing expressed as a percentage, including interest and applicable fees. Signature loan APRs typically range from 8% to 36% based on creditworthiness.

• Prequalification: A preliminary review that lets you see potential loan offers and estimated rates before a full application — typically done without a hard credit pull.

Sources

• Consumer Financial Protection Bureau (CFPB): What Is a Personal Loan?

• CFPB: What Is a Debt-to-Income Ratio?

• myFICO: Credit Score Education

• CFPB: What Should I Know if I'm Thinking About Co-Signing a Loan?

Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.

Sarah Silbert and Jasmin Baron, CCC™ contributed to the reporting for this article.

Photo credit: Liubomyr Vorona / iStock.com