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.

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.

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.

Unsecured Loan Interest Rates and Terms

Unsecured loans are normally available with terms ranging from two to five years. The borrower receives a lump sum and repays the loan with equal monthly installments. Unsecured loan interest rates are usually fixed. However, there are also revolving lines of credit, which function like credit cards. Borrowers set them up and draw on them as needed, paying interest only on the amounts used. The monthly payment is based on the loan balance and interest rate, which is variable.

Interest rates on unsecured loans (the legitimate kind) vary according to the lender's policies and the credit ratings of the borrowers. In 2014, rates for loans range from 6-7 percent at the low end to about 40 percent at the high end.

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    Credit Score
    Your credit score is a number designed to measure your credit-worthiness. It's based on a formula that combines many factors, including your payment history, amount of credit used and number of accounts. This number is used by lenders to calculate the probability that you'll default on your mortgage. Most lenders won't approve mortgages to applicants with credit scores lower than 620. Your credit score is one of the most important factors that determines your mortgage rate - applicants with higher scores are offered better mortgage rates.
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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!