What Is A Signature Loan?

A signature loan is a type of installment loan that you can qualify for based on a strong credit score. The good news here is that you do not require collateral to secure a loan, which sets them apart from secured loans like home loans or auto loans.

The terms of this loan mean you must make regular monthly payments throughout the agreed duration of the loan, just like any other installment loan. Since these loans are unsecured, your assets like home or vehicles are not at risk. However, non-payment will directly affect your credit history and credit scores.

How It Works

Through a signature loan, you can expect to receive a lump sum amount of money that can be used for any reason you choose. Since it is a one-time loan, you will receive the entire sum at once.

If you are seeking additional funds, you may be able to make use of a revolving line of credit to apply again. The payment terms are usually between one to five years. However, when looking to repay early, you should always seek lenders that do not charge a prepayment penalty.

These loans are ideal for vacations, medical expenses, home improvements, or even emergencies when facing cash flow issues. You may even be able to use such a loan to make payment and pay off your credit card in full.

It is possible to obtain this loan type at a 7% interest rate for an amount that you are carrying on your credit card. This is relevant if a credit card is accompanied by a higher interest rate, often ranging between 12-20%. Accordingly, you can use this loan to repay the credit card debt at a steep discount when compared to the higher interest rates exhibited by credit cards.

What Interest Rates You Can Expect

Your credit score plays a big role in determining the interest rates available for this type of loan. When you have a good credit history, you can expect the interest rates to be in single digits. However, if you have a poor credit score, the interest rate may be as high as that of a credit card. In some cases, lenders may even charge you at 30% interest. Signature loans for bad credit scores are not ideal if you cannot afford a higher interest rate.

When deciding to opt for this specific type of loan, you must also consider the other costs associated like the origination fee, prepayment penalty, and late payment fees.

Types Of Signature Loans 

This type of loan can take multiple forms:

• Personal loans – These are standard non-collateralized loans offered by most banks and credit unions. The term signature loan will often be used by credit unions, while banks use the term personal loans.
• P2P (peer-to-peer) loans – A loan may come from individuals on a P2P lending platform who have money to lend, or investors who wish to lend to borrowers like yourself (for instance a signature loan no credit check). Your lender might require you to produce additional information like rent receipts and other utility payment proofs.
• Payday loans - Payday loans are also a type of signature loan because lenders don’t have collateral if you don’t pay back the loan amount. However, it is best to avoid payday loans as they are notoriously famous for higher interest rates and less flexibility.
• Medical loans - Affiliated lenders allow people to borrow to cover medical expenses like fertility treatment, dental treatment, and more.

When Is It A Good Idea?

Though this loan does not require collateral to secure the loan, it can potentially be an expensive option depending upon the interest rate. If you are considering opting for the best signature loans, you must consider the monthly repayment costs and how to manage them.

If you are looking for debt consolidation, this type of loan might be a good idea as well. You may be able to consolidate different credit cards with higher interest rates into a single loan with a lower interest rate. This will help you save a lot of money towards interest payments.

Additionally, you must consider the cost factor, which is significant for any type of loan. To get lower interest rates and better terms, it is essential to have a good credit score and credit history. Interest rates can skyrocket if you have a bad credit history, which is the biggest downside of this loan type.

Finding and applying for signature loans online is easy given several lenders offer an entirely online application process. The application process can be swift if you have all the necessary documents with you like your social security number, proof of income, and up-to-date contact details.

Conclusion

Signature loans are ideal as a quick, short-term option to cater to your financial needs. However, you must consider your own personal financial situation and whether you have any alternatives to turn to like savings or emergency funds. You must also study the pros and cons to identify what works best for you.