A signature loan is basically a personal loan where no collateral is required. That simplicity is part of its appeal; you borrow a set amount and pay it off in fixed instalments with the freedom to use the money for whatever purpose. They can be a more straightforward, faster option than credit cards and many other cases. However, you must ask whether the terms are actually going to make sense for your budget, credit profile and the reason you’re borrowing in the first place.
What Makes a Signature Loan Different?
Contents
A signature loan is based on your promise to pay it back, not some asset that you put up against the loan. And that sets it apart from a mortgage, which uses your house as collateral or an auto loan, which is tied to a vehicle.
Since it’s a high-risk loan to the lender, they tend to scrutinize your credit score, income history, job history and overall financial situation before they consider lending you money. Your signature represents a legal commitment, so they’ve historically been called as good faith loans or character loans.
Where Signature Loans Can Be Used
Debt consolidation – A signature loan can help combine multiple credit cards into a single, manageable payment that’s due just once a month.
Emergencies – Medical bills, home repairs, unexpected travel or car troubles.
Major life events – Moving to a new city, paying for a wedding, a down payment on a new house or renovation costs.
How the Numbers Actually Work
You get a signature loan, usually handed out as a one-off payment up front. As soon as you get the green light, you get the full amount and then pay it back in fixed monthly chunks over a set timescale that you agreed to.
Most signature loans have repayment terms ranging from 2 to 5 years. Some lenders do offer longer repayment periods, though. Because the monthly payments are fixed, you know exactly how much you’re up for each month and exactly when you’ll finally be debt-free.
The loan amount you’re eligible for can be anything from a few hundred dollars to $50,000 or even a bit more for highly qualified borrowers. The amount you’re offered will depend on a few key things, though:
- Credit score
- Credit history
- Income
- What other debts do you have already?
- Job stability
That said, you can get a signature loan of as much as $1,000 from some online lenders within hours and it may not even require a great credit score.
Why Many Borrowers Find Them Worthwhile
Unlike, say, credit cards, which tie the money you borrow to specific spending, signature loans let you do just about whatever you need them for.
Speed is definitely another advantage. Lots of lenders can get through applications quickly and get the cash into your account the same business day or within a few days.
On the predictability front, it can be a big plus that signature loans generally come with fixed interest rates and fixed monthly payments. That makes budgeting a lot easier than revolving debt that can drag on for years if you’re only making the bare minimum payments.
They’re often cheaper than credit cards.
Where the Risks Start Showing Up
The biggest problem borrowers make is forgetting about the real bottom-line cost of taking on that debt. You might have origination fees, late payment fees or even have to pay a penalty for trying to pay the loan off early.
Once it’s issued, your monthly payments are usually set in stone, with any missed payments hurting your credit score.
Conclusion
For the majority of borrowers, a signature loan is definitely worth it, but usually for reasons that are less exciting than the advertisements suggest. Its real value lies in resolutions of financial problems, like ditching an expensive credit card burden with a lower-rate loan or spreading the cost of a necessary major expense over manageable monthly payments. A loan with a fixed payment can bring a bit of order and stability to finances, but only if the payment fits comfortably into the budget and you get the real benefit of that lower rate after all the fees have been factored in.