Signature Loans: What Are They and Should You Get One?
‘Signed, sealed, delivered, I’m yours.’
Stevie Wonder may have unknowingly written the perfect jingle for signature loans. They’re a type of personal loan, and if you take one out you’ll be part of a growing community.
In the last five years, the amount of money that consumers owe on personal loans has doubled. Read on to find out why a signature loan could be right for you.
The Way Signature Loans Work
Signature loans are also referred to known as character loans or good faith loans. They’re a kind of personal loan banks and other finance companies offer. They use only the borrower’s signature and their promise to pay as collateral.
Signature loans are normally used for any purpose the borrower chooses. The interest rates on these kinds of loans can be higher than some other types of credit because of the lack of collateral.
Collateral can be a person’s property or an asset that they would promise to a lender. This would secure the loan in the event that the borrower stopped making payments.
With a signature loan, you would provide your personal information. This will include your income and credit history. As well as this you’ll provide your signature and a promise to pay back the loan.
Where to Get Signature Loans
Unsecured loans are available from a variety of lenders. These range from traditional banks, credit unions, and online lenders. Check out Bonsai Finance to find out the fastest way to get a signature loan.
Most signature loans require you to make regular monthly payments over the life of the loan and until it’s paid off. The payment amounts are usually the same for all the installments over the life of the loan.
Making the Monthly Repayments
You should always be sure that you will be able to make these payments. If you fail to do so, it will be a big red flag to any lender.
However, with a signature loan, the lender would not be able to come after your home or other assets. It is likely though that you will damage your credit history and credit scores.
Information such as the nonpayment of a loan can stay on your credit reports for seven years. This could lead to you paying higher interest rates on future loans. It could also prevent you from getting approved at all for further loans.
The Size of the Loan
Because there is no physical asset required to secure a signature loan, the amount you could borrow may be relatively small.
Mortgages can run into hundreds of thousands of dollars, but the property would secure the loan.
A history of successfully borrowing and repaying loans should enable you to borrow more. New borrowers or those with poorer credit reports may be limited to smaller loans.
Getting Approved for a Signature Loan
Your lender will normally want to see that you have a solid credit history. They’ll also need to know that you have adequate income to repay the loan.
Sometimes, the lender may require a co-signer on the loan. The co-signer would only sign a promissory note. They would only be called upon in the event that you defaulted on your payments.
The interest rate on a signature loan can be higher than other types of credit because of the lack of collateral.
Signature Loans and Revolving Credit
A revolving credit loan application typically triggers a funding delay. Cash obtained through signature loans tends to be deposited in the borrower’s account more quickly.
Once the signature loan and any interest are paid back in full, the account will be closed. You would need to apply for a new loan if you required further funds.
With a revolving credit account, you would repay the loan. You would continue to maintain the line of credit until you or lender chose to end the relationship and close the account.
The Purpose of a Signature Loan
Many people use signature loans for home improvements or unexpected expenses. They might also use them to pay off medical bills, for vacations or other large expenditures.
They can often also be used to consolidate other debt. Let’s say you owe several thousand dollars on different credit cards. You may be paying high rates of interest.
You may also be having trouble remembering when to make the minimum payments on each card. It can make sense to pay off all the cards with a signature loan.
This simplifies your debt into one single monthly payment. You may well also end up paying substantially less interest.
Things to Watch out For
Cost is one of the key things to consider when taking out a loan. If you have good credit may you may well qualify for better rates and more favorable terms.
If you don’t have a great credit history, your options may be more limited and you may have to pay higher interest rates.
You should always check the small print. Make sure you understand the loan terms before signing up for a loan. This includes any fees.
Check the interest rate on the loan amount. Aside from the loan itself, this is likely to be the most significant cost. How much interest you pay will be dependent on the size of the loan and its term.
Extra Fees
Check whether your lender will charge you an extra fee in order to process the loan. You should also find out if there would be any fees should you choose to pay off the loan early.
This can be important because you may know that you are likely to come into a bonus at work at some point. You might want to use that to pay off the loan more quickly.
Late payment fees are another thing to watch for. Most lenders will charge them. You should always pay on time to avoid these and the resulting impact on your credit history.
Taking out a Signature Loan
Signature loans are a fast way to get cash without the need for collateral. Always make sure you make the monthly minimum payments to avoid extra fees and damaging your credit score.
If you enjoyed reading this article, you’ll find lots more useful information in the ‘General’ section right here on our site.