What Is a Signature Loan?

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Do you need extra cash to cover an unexpected bill or repair? A signature loan can help you get quick funds for whatever you need. You won’t need collateral to get the loan, just a signature, so interest rates tend to be higher than other forms of credit. That’s why it’s important to consider the terms and interest rates before signing a contract. You want to avoid unexpected expenses and surprise fees.

What Is a Signature Loan?

A signature loan is an unsecured personal loan you can put toward expenses like medical bills, car repairs, home improvements, and vacations. Some people may even use a signature loan to consolidate other loans. Unlike secured loans, a signature loan doesn’t require collateral—something the lender can seize if you don’t repay your loan—like a car or boat. In other words, the lender can’t come after your assets if you fail to pay. For this reason, the interest rates are often higher than other forms of credit because only a signature is required. The interest rate for a signature loan can range from 5% – 36%, with most falling around 7% – 14%. There may be activation fees as well.

Wondering how to get a signature loan? You can apply for a signature loan through almost any bank or a financial lender. You’ll have to provide basic information, like your address and birth date, so they can check your credit history and credit score. In some cases, the lender may ask for access to your bank statements or other financial information like your annual income. A signature loan lender wants to make sure you’re able to repay it.

If you have a low credit score or little credit at all, you may still be able to get a signature loan. In some cases, the lender may request a co-signer on the loan in case you default on your payments. Even if you have a higher credit score, you might find yourself in a situation where a signature loan could help you. No matter your credit score, the interest rates on a signature loan might be higher, though, so carefully review the details of any offer.

How Does a Signature Loan Work?

The cash from a signature loan is usually distributed quickly, so you can pay your bills sooner. You may see loan approval within 24 hours and the money deposited in your bank account within a day or two. The speed depends on your lender, when you apply, and how that aligns with their business hours.

Your repayment schedule will depend on your lender as well. Some offer bi-weekly or monthly repayment plans. Either way, you’ll have installment repayments, meaning each payment is for the same amount. The time period you have to repay the loan will be based on what you agree to with the lender. Some require the loan to be paid back within a few months, while others might give you as long as a year or more. Review the repayment terms and schedule closely before signing any contracts.

Signature Loan VS. Personal Loan

Understanding your loan options can take time, but it’s worth the research. A personal loan is a short-term loan to help pay for personal expenses like a car repair or medical bills. The loan has a fixed term, such as six months, so it doesn’t fluctuate like a credit card does. Personal loans range from $1,000 to $100,000 and are usually unsecured, meaning you don’t need to list collateral like a vehicle. You can get a personal loan from online vendors, banks and financial institutions. The requirements differ based on the lender, but you’ll need to provide basic personal and financial information.

A signature loan is one type of personal loan. It can be used for any expenses you see fit, such as a vehicle, wedding or vacation. As you review personal loans and signature loans, look at the terms and rates. Make sure you’re getting a competitive interest rate, as it can save you hundreds or thousands of dollars.

Should You Take Out a Signature Loan? 

Taking out a loan of any kind is a big financial decision. While signature loans can be used for just about everything, they often carry higher interest rates. That’s why you should first consider other means for getting the funds you need. Ask yourself:

  • Can I borrow money from a family member or friend?
  • Can I pick up extra shifts at work or babysit for spare cash?
  • Is there anything I can sell to make some extra cash?

If these options aren’t available, consider other loan types as well:

  • Are there credit cards that offer low interest rates for the first year?
  • Are there secured loans that may require collateral but have lower interest rates?

Asking these questions could save you a large chunk of cash in the long run.

As an example, let’s say Clarissa considers a signature loan to pay for a used vehicle that costs $9,000. Her interest rate is 8.5% for a three-year term, which means she’ll end up paying $1,228 in interest. Paying over $1,000 in interest on a $9,000 purchase is substantial. While Clarissa doesn’t have a strong credit history, she decides to look for more options. She finds an auto loan with only a 5.5% interest rate, saving her $445.

Sometimes the interest on a signature loan won’t be detrimental, though. For example, let’s imagine Matt needs $900 to cover airfare for a trip with friends. With an interest rate of 8.5% for a one-year term, he only pays $42 in interest. The $42 may be worth it for him to join his friends on a trip next month.

Situations where it might make sense to get a signature loan:

  • Consolidate your credit cards: You can combine your monthly payments from your cards into one. Interest rates on signature loans can be cheaper than credit card rates. Read through the details on repayment schedules, fees, and terms before making this decision.
  • Make a purchase: If you plan to buy something, such as furniture or a home improvement, you may need help with financing. When you finance through the seller, it can be expensive. A personal loan might offer you a lower interest rate, but take your time to compare options.
  • Build your credit: If you don’t have much of a credit history, a signature loan could help you show lenders that you’re a responsible borrower. But it’s usually better to open a credit card or pay on an auto loan because rates are lower.

You don’t always need good credit to be approved for a signature loan. It can be more difficult to be approved with a lower credit score but a lender may still approve you—just with a higher interest rate. Most importantly, do research on rates and terms before taking out a loan or making any large financial decision.

Sources: Investopedia | U.S. News

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