Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 29, 2012

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Signature loans are a type of unsecured financing that does not require any collateral.

Collateral, such as homes and cars, is sometimes used in lending to secure money by offering something of value which can be seized by the lender if a borrower stops repaying a loan.

Prospective borrowers looking for signature loans have no such worries since collateral is not involved.

As a result, however, lenders usually charge higher interest rates in order to compensate for their increased risk. Even though a good credit score may land a borrower a better interest rate, in general, unsecured loans will see higher interest rates than secured loans due to the lack of collateral.

Signature Loan Requirements

In order to obtain a signature loan, applicants must first collect their recent pay stubs. These financial documents will show lenders that a borrower has an income that can be relied upon for repayment. Lenders typically require between 6 months to one year of verifiable proof of recent income.

With these documents in hand, applicants should approach and contact various lenders. Traditional banks and credit unions usually offer signature loans, but there are a broad range of other lending sources, including online lenders. While credit unions generally offer better interest rates than banks, any long-standing relationships existing between a bank or credit union and a borrower may serve borrowers well when applying. This is because most financial institutions favor long-standing customers.

Borrowers should review and compare the various policies, offered interest rates, and penalties that lenders mandate in their signature loan contracts. Understanding fees and keeping an eye out for any problems, such as ballooning interest rates, is the best way for prospective borrowers to avoid becoming indebted to a bad lender.

Prior to agreeing to any contract, borrowers should try to negotiate the offered interest rate down. This can be extremely useful since a lower interest rate means that less money must be paid each month. Borrowers with good credit scores can be very successful in negotiations since they have a positive track record of excellent repayments. However, not all lenders are open to negotiations when it comes to changing an offered interest rate.