What is a signature loan and how does it work?

Written by

Jerry Brown,

Edited by

Published on February 24, 2025 | 4 min read

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Key takeaways

Signature loans are another name for unsecured personal loans.
Lenders evaluating you for a signature loan will consider factors such as income, credit history and credit score.
Signature loans have lower rates than credit cards but higher rates than secured loans, making them useful for debt consolidation or covering emergencies and life events.
While signature loans are a fast way to borrow money, they can have many fees, high interest rates for borrowers with poor credit and a rigid repayment schedule.

If you’re looking for a loan that doesn’t require you to have collateral, a signature loan (another name for an unsecured personal loan) could be a good solution. Signature loans can be used for almost any purpose. Plus, you can receive funds fast — some lenders issue funds as soon as the same business day.

However, like all financial products, these loans have disadvantages. Some lenders charge fees, and you may receive a high interest rate. Before you apply for a signature loan, look into the details of these loans to be sure it’s the right choice for you.

What is a signature loan?

Unsecured personal loans are sometimes called signature loans. Unlike a secured loan, this type of loan doesn’t require you to pledge collateral — something of value, like a bank account or house — a lender can seize if you fail to repay the loan. Instead, the loan is backed by your signature, which represents a legal promise to repay the loan funds.

Because the loan is unsecured, lenders typically charge a higher interest rate than secured loans, such as mortgages and auto loans. The average interest rate for signature loans is often lower than the average interest rate for credit cards.

Also, loan funds can be used for almost any purpose, such as medical emergencies, debt consolidation and major life events.

How does a signature loan work?

When you apply for a signature loan, a lender considers factors such as your credit history, income and credit score to determine whether you qualify for a loan. These factors also help a lender determine your interest rate and loan amount.

If you’re approved for a signature loan, a lender will issue you a lump sum of cash. You then repay the loan amount, plus interest, over a set repayment period that typically ranges from 24 to 60 months or longer.

What are the best uses of a signature loan?

The best use of a signature loan depends on your unique financial circumstances. Here are some scenarios where using one might make sense.

Debt consolidation: If you qualify for a signature loan with an interest rate that’s lower than you’re paying on current debt, debt consolidation may save you significant money on interest.
Emergencies: You can get an emergency signature loan quickly if you don’t have an emergency fund or the expense is too large.
Major life events: A signature loan can help you cover expensive events like a wedding, move to another state or home remodeling project.

Where can you get a signature loan?

You can get a signature loan from several financial institutions, including banks, credit unions and online lenders.

Banks

Many traditional banks offer signature loans. If you already have a relationship with a bank, reach out to its customer service department to ask about their loan options. You may receive an interest rate discount for being an existing customer. Alternatively, contact a bank by phone to see if it offers unsecured personal loans.

Credit unions

Some credit unions offer signature loans, and the interest rate is often lower than those offered by banks. For example, the average rate for a three-year unsecured personal loan at a credit union was 10.80 percent as of the fourth quarter of 2024, according to The National Credit Union Administration. By contrast, the average three-year rate for a personal loan at a bank was 12.03 percent.

To take a personal loan out at a credit union, you must be a member or apply for membership.

Online lenders

Multiple online lenders offer unsecured personal loans. To find them, you can visit an online marketplace or search for individual lenders. An advantage of applying with an online lender is that most allow you to prequalify to check your estimated rates and terms, without harming your credit score.

How much can you borrow on a signature loan?

Though the exact limits will vary by lender, you can generally borrow as much as $50,000 with a signature loan, although some lenders offer higher maximum amounts. For example, Lightstream offers loans of up to $100,000 for qualified borrowers.

A lender’s decision about how much an applicant can borrow is based on factors such as credit score and income. In general, signature loan amounts will not be as high as other types of loans because there is no collateral being provided to secure this type of loan should you default on payments.

Pros and cons of signature loans

Pros

Quick funding. Do you need money fast? Some lenders may issue your loan funds the same business day or within a few business days after loan approval.
No collateral needed. Since all signature loans are unsecured loans, you don’t have to worry about a lender repossessing your car or foreclosing on your home (unless a court awards a judgment to the lender).
Lower interest rates than credit cards. The average personal loan interest rate is typically lower than the average credit card interest rate.

Cons

Some lenders charge fees. Origination fees, late fees, and prepayment penalties can greatly increase your borrowing costs.
Potentially high interest rates. If you have bad credit, a lender may charge you a high interest rate. Some lenders have maximum advertised interest rates that are higher than 30 percent.
Late payments can damage your credit score. If your payment is more than 30 days late, it can cause major damage to your credit score, making it harder to qualify for future loans.

How to get a signature loan

If you think taking out a signature loan is right for you, follow these steps to get one:

Review your credit report. Inaccurate and incomplete information can lower your credit score. Before you apply for a loan, review your credit reports to make sure they are accurate. You can obtain one credit report for free every week by visiting AnnualCreditReport.com. If you find a credit reporting error, dispute it with each credit agency that lists it.
Prequalify with multiple lenders. Compare your loan options by prequalifying with as many lenders as possible. Once you submit your application, a lender will perform a soft credit check to review your credit, which has no impact on your credit score. If you prequalify, you’ll be given estimated rates and terms.
Submit a formal loan application. Once you’ve chosen a lender, complete a loan application. You’ll likely be asked to submit personal and financial information, such as your name, employer, social security number (SSN), income and bank statements.
Sign the loan agreement and receive funds. If your application is approved, a lender will send you a loan agreement to sign. Review the terms carefully and sign if you agree with them. Afterward, the lender should deposit the funds into your bank account within a couple of business days.
Repay your loan. Make sure to repay your signature loan as promised. If you miss payments, you may pay a late fee and it could damage your credit, making it harder for you to take out future loans. Enroll in automatic payments or use a spreadsheet to stay on top of your due date.

Bottom line

A signature loan is just another name for a personal loan. These unsecured loans are a quick way to borrow money without having to put up collateral if you need to cover large, unexpected costs or make large purchases. Like with any loan, it’s important to borrow responsibly and repay a signature loan on time to maintain a healthy credit score.