At a Glance

Whether you need funding for a home renovation, debt consolidation, medical expenses, a large vacation or wedding, an emergency expense or something else, a personal loan could be an option. Depending on your credit score and history, income, and other factors, there are two loans you should consider: Signature loans and personal loans.

While they are very similar, signature loans are unsecured while personal loans can be secured. Knowing the differences and which is right for your circumstances can help ensure you get approved for the right funding at the right cost.

In this article, you’ll learn:

Signature loan vs. personal loan: Key differences

While these two loans share several similarities, the biggest difference between a signature loan and a personal loan is the collateral required:

  • Signature loans are always unsecured, meaning you will never have to provide collateral to be approved. If you fail to repay the loan, the lender is not able to seize any assets. This makes getting these loans a little more difficult: You typically need to have a credit score of at least 670 and enough income to make the payments.
  • Personal loans can be unsecured or secured. If you have good credit, a steady income, and a low debt-to-income ratio, you’ll likely qualify for an unsecured personal loan. Otherwise, you may have to apply for a secured personal loan, meaning you must provide collateral to secure the loan. And, if you fail to repay the loan, the lender can seize your assets.

For both loans, your interest rate depends on factors like your credit score and history, income, debt-to-income ratio, loan term, and more.

How do signature loans work?

A signature loan is a type of personal loan you’d get from a bank, credit union, or online lender. Essentially an unsecured loan, no collateral is required to get approved for this loan. Instead, all you must provide is a signature on a promissory note, promising you’ll repay the loan plus interest.

If you’re approved for a signature loan, a lender will issue a lump sum of cash. You can use those funds for just about anything you want. You then must repay the loan in monthly payments, or installments, over a set repayment period, or the term.

Because there are no liens on any collateral, recovering unpaid balances are difficult so these loans are more risky for financial institutions to approve. That means signature loans can be more difficult to qualify for.

Learn more: Signature Loans

How do personal loans work?

A personal loan can also be borrowed from a bank, credit union, or online lender. You can borrow up to $100,000 with loan repayment terms typically ranging from one to seven years, though they could be longer.

Like signature loans, once you’re approved, the lender will issue you a lump sum of cash that you can use for whatever you need. Then, you must make regular monthly payments (plus interest) until the loan is repaid.

These loans are also typically unsecured, meaning they aren’t backed by any collateral. However, if you have poor credit, a low income, or don’t meet other requirements, you may be able to apply for a secured personal loan. You may also apply for a secured personal loan even if you do have good credit because the interest rates are often lower.

In this case, the loan would be backed by something of value like your house or vehicle. The downside is if you fail to repay the loan, the lender can seize your asset.

Learn more: What is a Personal Loan?

Credit score required for a signature loan and personal loan

Signature loans are best for those with good to excellent credit, so your score should be at least 670. The higher your score, the lower the interest rate and the better the terms that you’ll qualify for. You may still qualify if you have a lower score, but interest rates may be way higher and the loan overall more expensive.

For a personal loan, you typically need a credit score of at least 610 to 640, though like for signature loans, the higher, the better. You may be able to find lenders who will accept scores as low as 550 or even lower, but you’ll have a more difficult time qualifying and your interest rate will be high.

When does a personal loan make sense?

Personal loan funds can be used for just about anything, and can be a good idea when:

  • You need funds quickly.
  • You’re able to secure a low interest rate.
  • You can afford the monthly payments.

Some reasons you may want to take out a personal loan include:

  • Debt consolidation
  • Paying for a wedding or other large purchase
  • Funding emergency or unexpected costs
  • Paying medical bills
  • Financing growing your family, such as through adoption
  • Paying for home improvement projects

Finance your purchase or project with a personal loan

Personal loans can be an affordable way to pay for a large expense, major event, or debt consolidation.

Compare loans

When does a signature loan make sense?

You should carefully consider any type of debt, but if you need funds for a larger project or event, a signature loan may make sense. Consider one when one of the below situations applies to you.

1. Making home improvements

Updates or repairs that can increase or restore your home’s value are typically worth doing. However, some of these repairs can be costly. A home equity loan (HEL) and home equity line of credit (HELOC) may be difficult to get, especially depending on the equity in your home, so a signature loan may make more sense.

However, before applying, make sure you understand the total loan cost, including all fees and interest. If this amount is less than the expected home value increase after the repairs/improvements, applying makes sense. Otherwise, you may want to consider an alternative financing method.

2. Consolidating high-interest debt

The cost of high-interest debt like credit cards or lines of credit can add up quickly and send you in a debt spiral. If you have a large amount of high-interest debt, consider consolidating. You can use a signature loan to do this.

First, make sure the signature loan has a lower interest rate than the debts you’re consolidating. You’ll also want to ensure the loan has a fixed rate, so the monthly payments will be the same and the interest will be predictable. Finally, make sure you can afford the monthly payments.

Related: How to Consolidate Debt?

3. You don’t have assets for a secured loan

You won’t be able to get approved for a lower-interest secured loan if you don’t have assets the lender will accept as collateral. If this is the case, a signature loan can be an alternative (since you don’t need collateral for it). However, know that the interest rate may be higher so you’ll owe more over time.

When should you not get a signature loan?

On the other hand, there are some times when a signature loan doesn’t make sense:

1. When you have plenty of collateral

If you have equity in a car, home, business, or other valuable asset (which means you owe less than what it’s worth), you can use it to get a secured personal loan. This may be a better option because secured loans often have lower interest rates and fewer fees, so it’s a better value.

2. Financing an impulse buy

It’s never a good idea to take out a loan for an impulse buy. Even though you’ll get that instant gratification, you’ll be spending the next months or years repaying what you borrowed, plus interest. In the end, you’ll be paying more than the loan was worth.

Instead, save the money you need over time. Waiting until you have enough to purchase it outright can help you avoid interest, fees, impact to your credit score, and financial stress. You’ll also have time to determine if this purchase is even necessary.

3. You have bad credit

Poor credit makes getting a loan more difficult regardless of the type of loan you’re applying for. And, because a signature loan doesn’t require any collateral and it’s just your signature promising to repay it in full, you may have a difficult time getting approved. Or, you may have high interest rates and other unfavorable terms.

If you have poor credit, instead consider a secured personal loan.

4. The loan has excessive fees

Most loans have fees, but some charge higher or more fees than others. For example, most personal loans have an origination fee typically between 1% and 10%. However, if you see an origination fee higher than 10%, or other fees such as prepayment penalties, payment processing fees, or application fees, you may want to avoid them.

5. When you need to buy a home or car

If you need to buy a home or car, apply for a mortgage or auto loan. These are secured loans, but usually have lower interest rates and fees compared to signature loans. You may not even be able to get a large enough signature loan to cover the cost, but even if you can, you’ll likely end up owing more in the long-term than if you went a different financing route.

FAQs

Signature loans can hurt your credit if the lender does a hard credit inquiry, which will drop your score by up to 10 points and remain on your history for two years. Your score can also be negatively impacted if you make late payments or miss payments completely. On the other hand, making payments on-time each month can help improve your credit.

Signature loans are best for those with good to excellent credit, so your score should be at least 670. The higher your score, the lower the interest rate and the better the terms that you’ll qualify for. You may still qualify if you have a lower score, but interest rates may be way higher and the loan overall more expensive.

Some lenders issue funds as soon as the same business day, though it may take a few business days before the funds are deposited.

No, signature loans are not a line of credit. Personal line of credit is similar to a credit card in that it’s a set amount of money from which you can borrow, up to the limit, for a given period of time (called a draw period). You simply withdraw what you need from the available balance, and then you’d pay interest on that amount. The money that’s repaid is available for you to borrow again while with a loan, you get the funds at once and you can spend at once or over time, but you don’t get more.