When cash flow becomes tight, several types of personal loans offer potential solutions. Signature loans stand out by offering excellent terms, requiring nothing more than your signature as collateral. Typically, they provide more attractive rates compared to other types of unsecured debt.
Embrace the Power of Signature Loans
Key Takeaways
- A signature loan relies exclusively on the borrower’s signature and promise to pay as security for the loan.
- Interest rates on signature loans are generally higher than secured forms of credit but can be lower than other types of unsecured debt like credit cards.
- Lenders offer signature loans to individuals with sufficient income and good credit histories.
What Is a Signature Loan?
A signature loan, also known as a “good faith loan” or “character loan,” is a personal loan offered by banks and finance companies requiring only the borrower’s signature and a commitment to repay. Unlike loans secured with physical collateral such as a car or home, it can typically be used for any purpose of the borrower’s choosing. While the interest rates might be higher due to the absence of collateral, they are often lower than credit card interest rates.
How a Signature Loan Works
To approve a signature loan, lenders generally evaluate the borrower’s credit history and income levels. Occasionally, a co-signer may be required to mitigate the lender’s risk, but the co-signer is liable only if the original borrower defaults on the loan.
Signature loans are a distinct type of unsecured term loan. Lacking physical collateral, these loans are “unsecured” but are structured as term loans, amortized over a pre-set period and repaid via consistent monthly installments.
The Quick and Convenient Solution: Signature Loan vs. Revolving Credit
Applying for regular or revolving credit can initiate delays as lenders evaluate the borrower’s eligibility. In contrast, funds obtained through signature loans are typically deposited into borrowers’ accounts more swiftly, offering quicker access to necessary finances.
Once a signature loan is repaid, the account is closed, and the borrower must reapply for more funds if needed. Conversely, a revolving credit account provides an ongoing line of credit until either party decides to close the account.
Real-World Applications of Signature Loans
Signature loans are versatile financial tools used for various purposes, including home improvements, managing unexpected expenses, covering medical bills, planning vacations, or making other significant purchases. Borrowers also frequently utilize them to consolidate higher-interest debts.
For instance, a borrower could secure a signature loan at a 7% interest rate to consolidate multiple credit card balances with rates ranging from 12% to 20%. This strategic move enables the borrower to save considerably by repaying debt at a much lower interest rate.
Signature Loans: A Unique Personal Loan Option
A signature loan represents one form of personal loan, distinguished by its unsecured nature. Unlike other personal loans requiring collateral, the primary security here is the borrower’s signature and trustworthiness.
Ideal Candidates for Signature Loans
Individuals with good credit generally qualify for signature loans, reflecting their established history of timely debt repayment. Those with poor credit might still obtain these loans by involving a co-signer. Some specific signature loans may not even necessitate a credit check; however, these often come with exceptionally high interest rates and are typically classified as payday loans.
How Much Can You Borrow with a Signature Loan?
Loan amounts range from as low as $500 to as high as $50,000, although the availability of these loans varies by institution.
Conclusion
Signature loans provide a flexible personal loan option relying solely on your promise to repay. Historically aimed at borrowers with poor credit, they are now more commonly available to individuals with better credit scores.
Keep in mind that not all financial institutions offer signature loans, and interest rates tend to be higher compared to secured loans. However, their convenience and flexibility can make them an attractive choice for managing various financial needs.
Related Terms: unsecured loans, good faith loans, character loans, collateral.
References
- Quicken Loans. “What Is a Signature Loan, and How Does One Work?”
- Corporate Finance Institute. “Revolving Credit Facility”.
- Experian. “What Is a Signature Loan?”
