Signature Student Loan: What It Is and How to Get One

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For many people, loans come attached to a certain collateral; examples of these include an auto loan or a mortgage. There are also loan options that are not backed by collateral; these are called signature loans.

Likewise, a signature student loan is debt lent by a private lender, such as a bank or credit union, that doesn’t require you to put up any assets. Instead, the lender will evaluate your credit history and debt-to-income ratio among other factors to determine your eligibility and terms.

To get the full picture on signature student loans, let’s answer the following questions:

What is a signature student loan?

A signature student loan is a type of unsecured loan, which means there is no collateral involved. This is different from a secured loan, such as an auto loan, that would be backed by a purchased vehicle.

Signature loans are also known as “good faith loans” because the lender has determined, through its underwriting process, that you’re a good bet to succeed in repayment. They only require a borrower to sign a promissory note to receive loan funds. The borrower agrees to repay the loan over a set amount of time with a predetermined interest rate.

Common uses for a signature student loan

If you’re seeking a signature student loan, it’s likely that your federal financial aid allotment isn’t enough to cover your school’s cost of attendance.

It’s generally only wise to borrow signature student loans, also known as private student loans, once you’ve exhausted your search for grants, scholarships and work-study programs.

You should even consider federal student loans before signature student loans because government-owned education debt generally comes with greater safeguards, such as access to income-driven repayment plans and loan forgiveness programs.

Other types of signature loans are used for:

  • Debt consolidation: If a person wants to pay off multiple credit cards, a signature loan can be an ideal solution as it will provide enough funding to pay down the cards while only having one fixed interest rate instead of several.
  • Emergency funds: An emergency can happen at any time and result in a desperate need for fast money. A signature loan can help in this situation.
  • Other large expenses: Homeowners may take out an unsecured loan to take care of home repairs or improvements that doesn’t involve using their home as collateral. One example of this type of loan is a home equity loan. Or, parents may sometimes sign for a loan to help pay for their child’s school expenses without taking out additional student loans. Additionally, couples looking to pay for a large wedding may also want to borrow funds for it with a signature loan.

Should you get a signature student loan?

As with any type of debt, individuals and families need to make sure that going into debt is worth the trouble.

“When considering a signature loan, it is always best to take into account whether or not the loan fits into your budget,” Leslie H. Tayne, a debt relief lawyer based in New York, told Student Loan Hero.

Going through your finances is a vital first step in determining whether a signature student loan is right for you. You may also wish to speak to a financial advisor who can help you decide whether or not a signature loan is right for you.

Pros of signature student loans

Afford your next year of school. When borrowing an amount that’s affordable to repay, a signature student loan can be a useful tool to invest in yourself. Your lender will certify your tuition shortfall directly with your school and ensure that the funds arrive on time so that you can focus on your studies.

“Signature loans usually can be taken out very quickly, potentially with lower interest rates than credit cards, dependent on the borrower’s history,” said Ray Sturm, CEO of AlphaFlow, an investment company that provides real estate loans.

Access flexible repayment terms: While federal student loans carried historically low interest rates for the 2020-2021 academic year, signature loans maintain some exclusive options, including competitive fixed and variable interest rates, plus the ability to choose the length of your repayment term.

Cons of signature student loans

Negative impact on credit. While reputable lenders allow you to prequalify with a soft credit check, completing the application process for a signature student loan will require a hard check. This pull will cause a small drop in their credit score, but it will only last for a couple of months. Along with that dip, if they don’t get approved for the signature student loan, it can give off a bad impression when trying to apply for another loan. Lenders could view multiple applications as a sign of financial instability.

Potentially higher interest rate. Signature loans, as the name implies, need only a signature to take out the loan. With no collateral attached to the loan, the financial institution takes on more risk. More risk means the bank may require a higher interest rate on the loan. With that said, you could score a lower rate if you have good credit, a creditworthy cosigner or opt for a variable rate over fixed.

“A disadvantage can be the interest rate depending upon your personal situation,” said David Bakke, a personal finance expert at Money Crashers. “They’ll be rather high, but probably less than that of other loan options, such as a payday loan.”

The signature loan may have a more favorable rate than a credit card, but could still have a higher rate than a car or mortgage. Some private student loan borrowers lament double-digit rates on their debt.

May be hard to qualify for. Since signature student loans don’t require collateral, they can be harder to qualify for. Lenders may require a higher minimum credit score requirement than with a secured loan. Your income and outstanding debts may also be considered. If your credit file is thin or bruised and you need a signature loan, you may need to find a cosigner.

How can you get a signature student loan?

Obtaining a signature student loan is not much different than getting any other loan:

Research lenders: It’s often easy to find lenders locally. Your local bank or credit union may be a convenient option if you’re looking for a signature student loan. However, you should also seek out online lenders. They may offer more competitive rates and terms.

As you find potential student loan lenders, consider factors like customer ratings, the rates offered and what fees they may charge you.

Get preapproval offers: Many lenders allow you to apply for preapproval with a soft credit check. Doing so allows you to see what rates you may qualify for without harming your credit score. You can often apply for preapproval on a lender’s website. However, some lenders may take applications by phone or by mail.

Compare offers: Once you have preapproval offers, you can better determine which lender is the best option for you. You’ll need to decide for yourself what you’re looking for in a signature student loan. You may consider, for example:

  • Flexible repayment terms
  • Low or no fees
  • Interest rates

Select your offer: You’ll submit to a hard credit check to complete your application. If the lender approves your application, you’ll receive your finalized loan details and instructions on how to receive your loan funds.

Andrew Pentis contributed to this report.