What is a Signature Loan?

A signature loan, or unsecured loan, is a flexible loan that you can obtain without any collateral. You can use this personal signature loan to get money to spend for any purpose. You must only sign for the loan, and by signing, you are legally agreeing that you will pay back the money borrowed. People utilize signature loans for everything extravagant purchases such as vacations, plastic surgery, and buying major electronics to everyday needs such buying groceries, paying off credit card, and paying electric bills.

Because you provide no collateral when you take out a signature loan, lenders take into account both your income and credit score when determining whether or not to approve you for a signature loan.

Getting Signature Loans

Historically, only borrowers with a good credit history were able consumers able to obtain unsecured signature loans. As bad credit scores became more common during the recent recession, more and more lenders structured signature loans for bad credit.

Banks created bad credit signature loans so borrowers without any type of collateral to offer the lender could still get approval. The lenders use the term “signature” for the obvious reason, your signature is all that's required to secure the loan. The signed loan documents represent a legally binding contract between the borrower and the lender for a (negotiable) fixed period of time. As part of the agreement, the borrower promises to repay the loan in full within the time period specified by the contract.

Your Credit Score

With a good credit report, most lenders will allow you to borrow up to $15,000. With a very good credit score you may be able to apply for a larger amount. For individuals with bad credit, however, a lender may only allow you to take out a loan of a few thousand dollars. This is because you haven't had the best record for paying back loans on time and they don't want to take as much risk on you. Lenders will look at your personal balance sheet, meaning they will look at your income to expense ratio, or how much income you have compared to how many expenses. Lenders want to make sure you will be able to pay back the loan within the terms of the loan agreement.

In general, a signature loan comes due in less than 5 years, depending on the amount of the loan. Signature loans, called unsecured personal loans by some institutions, are structured much like auto loans, although the interest rate is higher because no collateral is involved.

Most financial institutions define a poor credit score as a number below 650. You should know your credit score before you apply for any type of loan, because a person with a poor credit score generally has a harder time getting a loan. The major companies involved in credit score reporting include Experian, Equifax, and Trans Union. Most lending institutions will not grant signature loans for people with poor credit if they have a bad credit report score of 550 or lower. (The lending institution would consider you to be too much risk.) Each of these three credit rating agencies has a website that explains their data collection and reporting methods. You can also compare the reports from each of the different agencies and report back to them if you find any discrepancies.

Banks, Credit Unions, and Private Lenders

The best institutions for taking out a bad credit signature loan are banks and credit unions. There are other lending institutions as well, but banks and credit unions tend to offer the most favorable rates. Private lenders, however, are becoming more popular because they will negotiate with the borrower and close on the loan quickly. They are also much more flexible in dealing with borrowers with bad credit scores, but you may pay a premium interest rate and you must also watch out for loan sharks.

Co-signers

Depending on the institution you chose and your credit score, you may need a cosigner to secure your loan. Choose carefully if you need one, because using a family member can lead to bad blood.

Good luck on securing your personal loan!