The Skinny on Signature Loans
There are plenty of situations that warrant the need to borrow money, and with the various loan types out there, the options are plentiful. One option is a "signature loan," which comes with its own set of advantages and disadvantages, just like other loan types.
There are a number of situations that warrant the need to borrow money, and with the various loan types out there, the options are plentiful. That said, it's in your best interest to research all the various types of loans available to you so that you can decide which one suits your needs and financial position best. One option is a "signature loan," which comes with its own set of advantages and disadvantages, just like other loan types.
What is a Signature Loan?
As the name suggests, a signature loan only requires the borrower's signature and promise to repay the loan amount. Also referred to as a 'good faith' loan or 'character' loan, a signature loan is a type of unsecured loan because no collateral is required.
Lenders will assess whether borrowers' credit history and income is sufficient to determine that they will likely be able to repay the loan in full and on time. In some cases, the lender may require a co-signer on the loan. That said, signature loans are often available for individuals with poor credit. Depending on the lender and borrower qualifications, the signature loan application and approval process can, sometimes be same day.
Signature loans can be used for anything the borrower wants. This may include paying off unexpected expenses, necessary home improvements or car repairs, medical bills, and many others.
The loan can be paid off over a specific time period in regular installments rather than all at once in one lump sum. After the signature loan has been paid back in full, the account will be closed. Should the borrower need a new signature loan be in the future, a new loan would have to be taken out.
Pros and Cons of Signature Loans
Like most other loan types, there are certain advantages and disadvantages that come with signature loans.
Quick and convenient. One of the biggest benefits of signature loans is that they are easily accessible and quickly available. The application process is simple and does not require the lender to go through lengthy measures to assess the borrower before an approval is granted. That means access to much-needed funds is fast and easy and can be applied directly to whatever expense needs to be covered right away.
No collateral necessary. All that's needed to obtain a signature loan is the borrower's signature. There's no need to secure the loan with any assets, which means there's no risk of having any prized possessions taken away should the borrower default on the loan, such as a car or family home.
Higher interest rates. Generally speaking, the interest rates charged for unsecured signature loans tend to be higher than secured loan rates. That's because the lender is taking on additional risk without any collateral to back them up should the borrower be unable to repay the loan. Generally, borrowers with better credit may be offered slightly lower rates, while those with poor credit may be offered higher rates or even be denied. The lender may also require a co-signer on the loan.
Lower funds available. The amount of money that can be borrowed through an unsecured signature loan is usually much lower than with a secured loan.
Is a Signature Loan Right for You?
Those who don't wish to put their assets at risk may find an unsecured signature loan option the way to go. While the interest rate may be higher and the loan amount lower, not having to put down collateral to back a loan may be an attractive option for many.
The approval process is also much simpler compared to traditional secured loan options.
Signature loans are also potential options to help pay down much higher interest rate debt. A signature loan can help individuals consolidate mounting high-interest rates. If the loan obtained carries a much lower interest rate in comparison, paying down the higher interest debt with the proceeds of the signature loan can be a great advantage.
What Should You Do Next?
Before obtaining a signature loan, it's in your best interests to make sure that you look into all loan options available before settling on one type. You should also verify the credentials of the lender to ensure they are reputable and are well versed in the realm of this specialized type of loan. Make sure that you are financially comfortable with the repayments so that you are able to pay each installment in full and on time to avoid defaulting on your loan.
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