Signature loans are a type of unsecured personal loan that requires no collateral and only the borrower’s signature as a guarantee. If you’ve recently applied for a loan, you might have seen the terms personal loan and signature loan used interchangeably, but that’s not exactly the whole story.
Some lenders, including banks, credit unions, and online finance companies, may use branding terminology and other words to describe their personal loan offerings, but the important thing is that you understand the loan terms, payments, and costs to avoid getting into an unexpected situation.
That said, all types of unsecured loans require a higher credit score and a more favorable credit history than secured loans, so it’s important to be prepared and have your financial house in order before applying.
Key Takeaways
- A signature loan is a type of unsecured personal loan that does not require collateral.
- Personal loans may be secured or unsecured, while signature loans are always unsecured.
- Lenders typically consider your credit history, income, existing debt, and ability to repay when evaluating a signature loan application.
- Compare APRs, fees, repayment terms, loan amounts, and monthly payments rather than focusing on whether a lender calls the product a personal loan or signature loan.
- Secured personal loans may offer more favorable terms, but they require collateral that could be at risk if you fail to repay the loan.
What Is a Personal Loan?
Personal loans are installment loans that give the borrower a lump sum payment up front in exchange for payments and interest over a set time period. The borrower is on the hook to repay the loan amount, interest, and any fees that accrue over the loan term. Personal loans are popular because you can generally use the funds for almost any purpose, including debt consolidation, home improvements, and unexpected expenses.
What Is a Signature Loan?
Signature loans are unsecured personal loans that require only the borrower’s signature and a solid credit history as guarantees. Because they don't require collateral, lenders generally rely more heavily on your credit history, income, debt obligations, and ability to repay when deciding whether to approve you and what terms to offer. They are otherwise very similar to everyday personal loans. The borrower receives a lump sum and makes payments with interest and fees over time.
Signature Loan vs. Personal Loan: What’s the Difference?
The main difference between personal and signature loans is the collateral requirement. Some personal loans require the borrower to submit assets to secure the loan, which could include property, cars, and other valuable items. Signature loans never have a collateral requirement, and they generally come with more restrictive credit requirements.
If the borrower defaults on a secured loan, their property is at risk of repossession, but signature loans do not have that problem. Unlike a secured loan, a signature loan doesn't give the lender a specific asset to repossess if you default. However, missed payments can damage your credit, lead to collections, and potentially result in legal action.
The two loans are similar in most other ways, including how the funds can be used. Borrowers can use both loan types to repay other debts, make home improvements, take a vacation, or cover almost any other legal expense.
Is a Signature Loan Better Than a Personal Loan?
Not necessarily. The better loan depends on your situation, including your credit score, income, and assets. A secured personal loan may offer a lower interest rate or more favorable terms because the lender has collateral to reduce its risk. If your finances are stable and you're confident you can manage the payments, putting an asset at risk may be less of a concern.
Signature loans work well for borrowers who qualify for competitive terms without pledging collateral. Otherwise, they work much like other personal loans, with a fixed loan amount, repayment period, interest charges, and scheduled monthly payments. Borrowers are still responsible for fees, including origination and servicing fees (if applicable), interest, and monthly payments.
The bottom line is that the loan terms and conditions matter more than the title attached to the loan. Focus on your finances and carefully read the loan terms to understand how each offer will impact your life.
How to Choose the Right Personal or Signature Loan
Like many things, it pays to shop around for the right loan. Some lenders periodically offer incentives, such as lower interest rates or more favorable loan terms, and you’ll miss those programs if you’re focused on one lender. It’s a good idea to take stock of your financial life before applying, taking the time to understand your credit score, income, and other expenses.
Compare each lender’s interest rates and terms, and many have built-in payment calculators to help you get a feel for payments with no hard credit inquiry. Make sure you’re comfortable with the payment amounts, and don’t sign up for a loan that puts you in a tough place when the payments are due each month.
Ultimately, the best personal or signature loan comes down to your preferences and comfort level. Choose the lender and loan that give you the best peace of mind and the terms that best fit your current financial life.
Additional Personal Loan and Financial Resources
Choosing between a signature loan and another personal loan is only part of the borrowing decision. These resources can help you compare lenders, understand credit and interest costs, manage existing debt, and decide how borrowing fits into your larger financial goals.
Compare Personal Loans and Debt Consolidation Options
Best Personal Loan Companies: Compare personal loan companies, qualification requirements, loan options, and other factors before choosing a lender.
Best Debt Consolidation Companies: Compare leading debt consolidation companies and options for combining multiple debts into a more manageable repayment plan.
Debt Consolidation Loans for Bad Credit: What You Need to Know: Explore debt consolidation options when a lower credit score makes qualifying for financing more difficult.
9 Real-Life Factors to Consider When Borrowing Money: Consider the practical costs, risks, and effects on your finances before taking out a loan.
Understand Credit and Borrowing Costs
How to Use Credit: Learn how to use credit responsibly while managing borrowing costs and protecting your financial health.
What Is a Tier One Credit Score? Learn what a Tier One credit score means and how strong credit can affect your borrowing options.
Compound Interest Vs Simple: Understand how simple and compound interest work and why the difference matters when borrowing or saving.
When Should You Use a Credit Card? Learn when paying with a credit card may make sense and when another financing option could be more appropriate.
How Can I Lower My Credit-Card Interest Rate? Explore ways to potentially reduce the interest you're paying on existing credit card balances.
When Should I Refinance – Anything? Learn when replacing existing debt with new financing could lower costs or improve repayment terms.
Borrowing for a Car or Home
How to Buy a Used Car Without Wrecking Your Finances: Learn how to budget, compare financing, and avoid taking on more auto debt than you can comfortably afford.
Should I Buy a Car or House First? Understand how financing a vehicle can affect your finances when homeownership is also one of your goals.
How Long After Debt Consolidation Can I Buy a House? Learn how debt consolidation may fit into your timeline for qualifying for a mortgage.
Does Debt Consolidation Affect Buying a Home? Here’s What You Need to Know: Understand how consolidation can affect your credit, debt-to-income ratio, and mortgage application.
What Happens If I Can’t Pay My Mortgage? Your Options and Next Steps: Learn what can happen after missed mortgage payments and what options may be available before foreclosure.
Strengthen Your Finances Before Borrowing
How to Find Extra Money in Your Budget: Identify expenses you may be able to reduce and free up money for debt payments, savings, or other priorities.
6 Common Budgeting Mistakes to Avoid: Learn which common budgeting mistakes can make it harder to manage expenses and reach financial goals.
What to Do With Extra Money: Consider ways to use additional cash for savings, debt repayment, investing, or other financial priorities.
Frequently Asked Questions
Conclusion
Don’t get caught up in the terminology. Personal loans and signature loans are functionally identical if both are unsecured, so your best option is to opt for the loan and lender that offer the best terms, lowest interest rate, and most favorable terms.
Take the time to compare multiple lenders’ offers, and be sure to get all of your ducks in a row financially before applying. Focus on the bottom-line costs and make sure you can afford the monthly payments, and you’ll be in a much better position on the other side of any loan application. Check out our overview of the best personal loan companies to learn more.
About Author
Chris Teague
After earning an MBA, Chris began writing about tech and finance as part of his work as a bank analyst and consultant. Wanting to pursue his first love in life, Chris jumped ship and turned his focus to the automotive industry, first as a freelance writer for Forbes, J.D. Power, The Drive, and U.S. News & World Report, before starting YourTestDriver.com and the America on the Road Radio Show. Chris brings more than ten years of experience in product reviews, in-depth analyses, and news, and has been recognized as a significant contributor in building the future of the automotive media field.