What do a casino marker, an IOU scribbled on a napkin, and a personal loan from a bank have in common? They are all signature loans, a popular form of borrowing that's become more accessible in the Internet Age.

Signature Loan Interest Rates

The great thing about unsecured loans such as these is that it's not necessary to put up an asset -- such as a home, car or valuables -- as collateral. So, if problems arise keeping up payments, there's little risk of ending up facing foreclosure or the attentions of a repo company.

However, that upside has a corresponding downside. The lender's money is less safe, and the bank or other financial institution must cover its extra risk by charging a higher interest rate than it would on a secured loan. Just how much higher depends on the individual customer's creditworthiness.

Lenders assign applicants a grade based on their credit rating, and the grade determines the interest rate offered. The difference in rates reflects the liklihood of default -- applicants with lower scores are not charged higher rates to "punish" them, only to make sure the lender's profit for loaning to people with blemished credit is the same as it is for lending to people with excellent credit.

In 2014, interest rates for unsecured loans varied from the five- to six-percent range for highly-qualified applicants to over 30 percent for the credit-challenged. On the other hand, rates for payday loans, title loans and cash advances run between 391 and 521 percent according to the Center for Responsible Lending.

Qualifying for a Signature Loan

Imagine George Bailey, the banker of "It's a Wonderful Life" fame, sitting at his desk in the Bedford Falls Building and Loan bank. A customer comes in who needs a loan in a hurry, and she has no collateral to offer. George would have seen his job as evaluating her income (her ability to repay) and her character (willingness to repay) before deciding to approve or decline her loan application. He'd have a chat with her, perhaps make a few phone calls, and then decide.

Of course, that was then, and this is now. Today, "character" means credit score, which measures a consumer's past success in managing debts. A customer might still impress a modern-day George with her character, but unless his computer says he can lend to her, his hands are not so much tied as encased, mob-style, in reinforced concrete. In addition to checking her credit, George must verify her income by analyzing pay stubs, W-2s, tax returns or perhaps bank statements, to make sure that she has the ability to repay the loan.

Virtually all signature loans require a credit check and income verification. Any product advertised as a signature loan, unsecured loan or personal loan with no credit check is not truly a signature loan. It's most likely a cash advance, title loan or payday loan with very high fees and interest rates -- and it should be avoided.

What Are Signature Loans?

People borrow money to meet many needs. Sometimes, they borrow to purchase things like houses, cars or boats. If they fail to repay these loans, their lender can take back the property and sell it to offset its losses. These loans are said to be "secured" by the property being purchased, and that property is called "collateral." Other times, though, consumers take out loans that are not secured, and there is no collateral for lenders to take back. These loans are called unsecured, signature, or personal loans. They are backed only by the borrower's income and his or her promise to repay.

Most signature loans come with fixed rates and payments, which makes budgeting easier, and are fully-amortizing, which means that at the end of the repayment term, their balance should be zero.

Shopping for Signature Loans

Interest rates for signature loans vary widely, depending on the applicant's credit score, amount borrowed, and the length of the loan (its term). Most signature loan terms run from one to five years, and in general, longer terms come with higher rates.

To get the best deal on a signature loan, consumers should provide several competing lenders with the same information -- credit score, income, amount and term -- and see who comes back with the best offer. Today, this is easy to do online. Shoppers should avoid allowing lenders to pull their credit reports until they have chosen the one they want, because inquiries do cause a small drop in the score -- and that drop could put an applicant into a lower grade and a higher rate!