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About Signature Loan
Everybody needs credit at some point in life whether it is to buy a new home, to pay off debts, medical emergencies, etc.
There are two categories of loans secured loans and unsecured loans. In secured loans, the lenders provide loans against collateral; the best example of a secured loan would be a mortgage.
In an unsecured loan, the bank or the lender provides loans without any collateral; an example of an unsecured loan would be signature loans. In this post, we will understand what is a signature loan in detail.
What Is A Signature Loan? How Does It Work?
A signature loan, also known as a “character loan” or “good faith loan,” is categorized as an unsecured personal loan.
Unlike a secured loan, this type of loan does not require security, such as an asset or home that the lender can foreclose if you don’t pay it back.
Instead, the loan is backed by your signature, which is a legitimate promise to repay the loan amount.
To determine whether to lend a signature personal loan, lenders typically look for solid credit history and sufficient income to repay the loan.
In some cases, a lender may require a loan guarantor, but a guarantor is only contacted if the primary borrower defaults on the loan.
Unsecured refers to the fact that these loans are not secured by any form of physical security, unlike auto loans and mortgages. Signature personal loans are amortized over a set period and paid back in equal monthly payments.
When you apply for this type of, lenders take into account factors such as your credit history, income, and credit score to determine if you qualify for the loan.
These factors also help lenders determine the interest rate and loan amount that the borrower qualifies for.
If you are approved for this type of unsecured loan, the lender will transfer you a lump sum in cash.
You then pay off the loan with interest over a fixed repayment term, usually 24 to 60 months or longer.
What Are The Pros And Cons Of Signature Loans?
Pros Of Signature Loan:
- Quick funding: If you need funds in quick succession, some lenders can withdraw funds within the same business day or a few business days once you are approved.
- No Collateral: Since all signature loans are unsecured loans, you don’t need to worry about the lender taking over your car or taking over your home.
- Low-Interest Rates than Revolving Credits: The average personal loan interest rate is usually lower than the average credit card interest rate. Using this type of loan to pay off high-interest credit cards balance would make good financial sense.
Cons Of Signature Loan:
- High fees and pre-payment penalties: most lenders will charge fees such as origination, late fees, and pre-payment penalties. These fees can significantly increase the cost of the loan.
- High potential interest rate: Since there is no collateral for such loans, the interest rate charged is higher than secured loans.
- Late payments can damage your creditworthiness: If your payments are more than 30 days late, it can severely damage your credit history and you could face challenges qualifying for any loans in the future.
Conclusion
Though the signature loan is a good option, the thing to note is that it is not available with every bank or lender.
Lenders who provide signature personal loans have higher fees and interest rates as the risk is higher for lenders due to a lack of collateral.
You can start your search online to check which lenders provide signature loans and ensure to have good credit and consistent income before applying for a signature personal loan.
I like that you pointed out how you won’t need to worry about the lender taking over your car or home since all signature loans are unsecured loans. A good property just went on sale and we want to purchase it, however, we’re a bit short on the necessary amount. So with that in mind, we are thinking of taking a signature loan, since we don’t want to pass up this property.