A signature loan is a type of personal loan that can be used for any number of purposes, from home improvements to debt consolidation to starting a business.
It’s an “unsecured” loan, which doesn’t require the borrower to put up any collateral to secure the funds from the lender.
Lenders of unsecured loans are typically banks, credit unions, or other lending institutions.
Also called a good faith or character loan, these loans are extended to borrowers despite the lack of collateral, because the borrower has good credit and a history of repaying their debts quickly.
Those with bad credit may need to look elsewhere for a loan.
To get approved, you’ll also likely need a good debt-to-income ratio, a permanent address where your lender can reliably find you, and low existing debt – so don’t apply for one of these loans after maxing out all your credit cards.
When you use your signature to get a loan, you’re getting a specific type of unsecured personal loan.
A secured personal loan requires using collateral, such as a house, vehicle, or business assets, and are typically sought out by people with bad credit who need to assure the lender that they’ll be able to recoup their funds one way or another.
Other types of unsecured loans come in many forms – such as credit cards and lines of credit, peer-to-peer (also stylized as P2P) loans that are increasingly found via online lending sites, and student loans, which of course are specifically for students and can’t be used for other purposes besides paying for education.
There are also short-term loans that come private loan companies, also known as payday loans. These don’t require having good credit or even collateral – just a proven means of repaying your loan, generally meaning employment.
The repayment terms for short-term loans from a private company are generally quite short and the interest rates are fairly high.
For this kind of loan, the interest rate will depend on just how good your credit score is.
Though you probably won’t be approved for any type of unsecured loan if you have poor credit, don’t expect a low interest rate – lenders are reluctant to give good deals to people who don’t secure their loan somehow.
That means the lender will almost certainly run a credit check, and is likely to deny you if you don’t have a score of 750 or higher.
In terms of repayment, that can vary as well, and will also affect your interest rate.
Some loans can have repayment terms that last just a month, while others go between two and five years.
Loan amounts typically go no higher than $20,000 for a single loan.
You’ll usually repay the loan over a fixed term in fixed installments.
Speaking of which, a signature loan differs from a credit card or line of credit in that it’s a one-time extension of funding – when that amount is repaid, the loan is finished and you’ll need to apply for a new one in order to get more money.
A credit card or credit line, on the other hand, can be continuously drawn upon and repaid.
The drawback there is typically that interest rates are higher, so you can find yourself in debt quick.
The final thing to consider is the possibility of needing a cosigner – unlike short-term loans from a cash advance company, banks and credit unions may ask someone with even better credit and/or means of repaying them to sign a promissory note and assume responsibility for the loan with you (only in case you fail to pay).
Once you obtain your loan, it’s up to you how to utilize it.
Popular uses include making home or business improvements, covering unexpected expenses, taking advantage of sales to buy in bulk, consolidating debt (for example, by using the lower interest rate on your loan to pay off other forms of debt with higher interest rates), and funding much-needed holidays and vacations.
Just be sure that you have the means to pay back the loan, and you’re free to do as you wish from there.
If you got your loan with the help of a cosigner, that person will likely be responsible for repaying your debt.
If you didn’t, it’s not like you’ll get away with not repaying your loan without penalty:
The lending institution may send a collection agency after you, or take you to court and get a judge to garnish your wages until you’re paid up.
The ramifications of not repaying your loan are huge, and your credit score will take a major hit if you default.
Try not to do that.
Visit your local bank or credit union to see what your unsecured loan options are, or visit LendGenius.com to connect with a lender quickly.
Now that’s genius.
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Persons facing serious financial difficulties should consider other alternatives or should seek out professional financial advice.
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