Are you looking for a loan that does not require collateral? A signature loan may be the right option for you. With the help of signature loans, you can sort out different emergency needs. The best part is that you can receive funds as fast as possible. Some lenders even send funds on the same business day.
However, just like every other financial product, signature loans do have their own disadvantages. Before applying for this type of financial product, it is advisable that you look into the details. To be sure that it is the right option for you.
What is a Signature Loan?
A signature loan, often called a personal loan, is an unsecured loan that is usually offered by a bank or lender based solely on your creditworthiness. This type of loan can be used for quick cash needs like car repairs, medical bills, or major events such as weddings. Also, signature loans can be used to consolidate higher-interest debt.
Sometimes known as good faith or character loans, these unsecured types of loans don’t require collateral. Instead, the lender relies on your promise to repay. This makes your credit history and score crucial in the approval process. A strong credit profile can help secure a loan with a favorable interest rate, while a poor credit history may lead to denial due to the potential higher risk.
How Does It Work?
When you apply for a signature loan, the lender reviews your credit history, income, and credit score to decide if you qualify. And to determine your interest rate and loan amount. If approved, you receive a lump sum of money and repay it with interest over a period. Usually ranging from 24 to 60 months or more.
A signature loan is essentially a type of personal loan. Personal loans encompass various kinds, such as secured loans, unsecured loans, debt consolidation loans, and variable rate loans. A signature loan, specifically, is an unsecured personal loan that doesn’t require collateral.
Pros and Cons of Signature Loans
Signature loans can be a flexible option for financing needs that might not qualify for other types of loans.
Pros
- Provides quick cash access, with funds often available within a few business days.
- Generally offers lower interest rates compared to payday loans or credit cards.
- Unsecured by assets, allowing you to still sell or borrow against your property.
- Loan terms can extend up to 60 months or more.
Cons
- Typically have higher interest rates compared to secured loans.
- Best suited for those with higher credit scores (around 600 or more).
- Applying can cause a small, temporary drop in your credit score.
- Lenders might charge extra fees, such as origination, late payment, or early payoff fees.
Where Can You Get a Signature Loan?
You can obtain a signature loan from various financial institutions, including banks, credit unions, and online lenders.
- Banks: Traditional banks provide signature loans. If you already have an account with a bank, contact customer service to inquire about signature loans. Being an existing customer might even get you a lower interest rate. You can also call banks to check if they offer unsecured personal loans.
- Credit Unions: Many credit unions offer signature loans, often with lower interest rates compared to banks. For example, in late 2022, the average rate for a three-year unsecured loan at credit unions was 9.66%, whereas banks charged around 10.40%. To get a loan from a credit union, you need to be a member or apply for membership.
- Online Lenders: Numerous online lenders provide unsecured personal loans. You can find them through online marketplaces or by searching for specific lenders. One benefit of online lenders is the ability to prequalify for a loan, allowing you to see potential rates and terms without impacting your credit score.
How to Obtain a Signature Loan
Obtaining a signature loan is a simple process, though it may vary depending on whether you choose an online lender or a traditional bank. Here are the basic steps:
- Gather Required Documents: Collect your Social Security number, income details, employment information, debts, and credit report. You can get a free credit report from AnnualCreditReport.com.
- Compare Rates: Prequalify with several lenders to compare terms, fees, and interest rates. Prequalification usually involves a soft credit pull, which doesn’t affect your score.
- Submit Application: Choose the lender with the best terms and complete a formal application. This will trigger a hard credit pull, causing a small, temporary drop in your credit score. Avoid applying to multiple lenders at once to minimize credit impact.
- Approval and Review: Approval times vary from minutes to a week. Carefully review the loan terms, including fees for early or late payments and origination costs, before signing.
- Receive Funds: After approval, the lender deposits the funds into your bank account. This process can take from a few days up to a week.
- Repay the Loan: Make timely payments to maintain good standing. Some lenders offer perks, like reduced interest rates, for setting up automatic payments.
The amount you can borrow with a signature loan varies by lender, but typically you can get up to $50,000, with some lenders offering as much as $100,000, according to Experian.
Lenders determine your borrowing limit based on your credit score and income. Because signature loans are unsecured and don’t require collateral, they usually have lower borrowing limits compared to secured loans.
