A signature loan, also known as an unsecured loan or personal loan, is a loan that does not have the backing of any collateral. When you take out a signature loan, the only thing that guarantees the debt is your signature, hence the name. Here are some things you should know about signature loans:

Types of signature loans
There are numerous types of loans that can be considered signature loans from IOUs among family and friends to personal loans from a bank. Essentially, any loan you receive without supplying collateral that can be used in lieu of payment is a signature loan. For example, a credit card is a type of signature loan. When you apply for a credit card, you are given the terms of the loan including the interest rate and credit limit (or loan balance). When you use the card and sign the receipt, you are agreeing to repay the loan according to the card issuer’s terms.

How to qualify
When you get a signature loan from a bank or credit card issuer, the only thing that is considered is your creditworthiness. The most important factor is your credit score. Because the loan is unsecured, lenders need to be well assured that you have a history of repaying debts in a timely fashion. Missed or late payments on your credit report will serve as red flags that you are not a desirable candidate for an unsecured loan. Your debt-to-income ratio and employment status may also be considered. It’s harder to qualify for a signature loan because all a lender has to guarantee the loan is your word the debt will be repaid.

Interest rates
Interest rates for signature loans are typically higher than a traditional loan and are almost always higher than mortgage loans. Personal loans from a bank are often higher than credit card interest rates. Your credit score will also affect what interest rate you can qualify for.

Cosigner
If a borrower is unable to qualify for a signature loan because of bad credit or not enough income, the lender may request a co-signer sign a promissory note to guarantee the loan. A co-signer with good credit can help get the loan approved. Even if you can get approved but your credit is less than stellar, getting a co-signer can help you qualify for a better rate.

What happens when the borrower defaults?
If you were to default on your car loan, your car would be repossessed to pay the debt. If you default on your mortgage, your house goes into foreclosure. With an unsecured loan, there is nothing that can be repossessed or sold to pay off an outstanding debt. If you default on a signature loan, the loan can be sent to a collection agent. Additionally, you will receive negative marks on your credit report and your credit score will go down. This will make it more difficult to get loans of any kind secured or unsecured in the future. You may also be sued for repayment.

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