What is a signature loan and how does it work?
If you’re looking for a loan that doesn’t require collateral, a signature loan could be a good solution. A signature loan can be used for almost any purpose. Plus, you can get money fast — some lenders issue funds the same business day.
However, like all financial products, these loans have disadvantages. Some lenders charge fees and you may get a high interest rate. Before you apply for a signature loan, check out the details of these loans to make sure it’s the right choice for you.
What is a Signature Loan?
A signature loan is an unsecured personal loan. Unlike a secured loan, this type of loan doesn’t require you to post collateral — something valuable, like a bank account or a home — that a lender can seize if you don’t repay the loan. Instead, the loan is secured by your signature, which is a legal promise to repay the loan funds.
Because the loan is unsecured, lenders typically charge a higher interest rate than secured loans such as mortgages and car loans. The average interest rate on signature loans is often lower than the average interest rate on credit cards.
Also, credit funds can be used for almost any purpose, e.g. B. for medical emergencies, debt consolidation and important life events.
How does a signature loan work?
When you apply for a signature loan, a lender considers factors such as your credit history, income, and credit score to determine if you qualify for a loan. These factors also help a lender determine your interest rate and loan amount.
If you are approved for a signature loan, a lender will issue you a lump sum of cash. You then pay back the loan amount plus interest over a set repayment period, which is usually between 24 and 60 months or longer.
What are the best uses of a signature loan?
The best use of a signature loan depends on your individual financial circumstances. Here are some scenarios where it might make sense to use it.
If you have high-interest debt, such as B. Credit card debt, using a signature loan for debt consolidation could be a good financial move. Debt consolidation means paying off your existing debt with a new loan. If you qualify for a signature loan with an interest rate lower than the average interest rate on your current debt, you can save a lot of money in interest.
Signature loans are also good for covering unexpected expenses like medical emergencies, car repairs, and home repairs. If you don’t have an emergency fund or the expenses are too much to cover, you may be able to get funds quickly.
Important life events
If you need to pay for an expensive event like a wedding, a move out of state, or an anniversary celebration, a signature loan could help. Just remember to only borrow what you can afford to pay back.
Where to Get a Signature Loan?
You can get a signature loan from several financial institutions, including banks, credit unions, and online lenders.
Traditional banks offer signature loans. If you already have a relationship with a bank, contact their customer service department to see if they offer unique personal loans. As an existing customer, you may receive an interest discount. Alternatively, call a bank to see if they offer unsecured personal loans.
Some credit unions offer signature loans, and the interest rate is often lower than that offered by banks. For example, the average interest rate on a three-year unsecured personal loan from a credit union was 8.95 percent as of June 25, 2021, according to The National Credit Union Administration. In contrast, the average three-year interest rate for a personal loan from a bank was 10.09 percent.
To get a personal loan from a credit union, you must be a member or apply for membership.
Several online lenders offer unsecured personal loans. To find them, you can visit an online marketplace or search for individual lenders. One benefit of applying to an online lender is that, in most cases, you can pre-qualify to review your estimated interest rates and terms without hurting your credit score.
Pros and Cons of Signature Loans
Before you take out a signature loan, you should weigh the pros and cons.
- Fast financing. You need money fast? Some lenders may issue your loan funds the same business day or within a few business days of loan approval.
- No collateral required. Because all signature loans are unsecured loans, you don’t have to worry about a lender repossessing your car or foreclosure on your home (unless a court awards the lender a verdict).
- Lower interest rates than credit cards. The average personal loan rate is usually lower than the average credit card interest rate. For example, from March 3, 2022 the average personal loan rate is 10.28 percent.
- Some lenders charge fees, such as B. Organization fees, late fees and prepayment penalties. These fees can significantly increase your borrowing costs.
- Possibly high interest rates. If you have bad credit, a lender can charge you a high interest rate. Some lenders have maximum advertised interest rates that are higher than 30 percent.
- Late payments can damage your credit score. If your payment is more than 30 days late, it can wreak havoc on your credit score, making it harder to qualify for future credit.
How to get a signature loan
If you think taking out a signature loan is right for you, follow these steps to get one:
- Check your credit report. Inaccurate and incomplete information may affect your creditworthiness. Before you apply for a loan, check your credit reports to make sure they are correct. You can view your Experian, Transunion, and Equifax credit reports weekly through April 20, 2022 for free by visiting com. If you find an error on the credit report, file a complaint with any credit reporting agency that lists it.
- Prequalify with multiple lenders. Compare your credit options with prequalification with as many lenders as possible. Once you submit your application, a lender will perform a soft credit check to verify your credit history, which will not affect your credit score. If you pre-qualify, you will receive estimated prices and terms.
- Submit a formal loan application. After you have decided on a lender, fill out a loan application. You will likely be asked to provide personal and financial information such as your name, employer, Social Security Number (SSN), income, and bank statements.
- Sign the loan agreement and get money. If your application is approved, a lender will send you a loan agreement to sign. Read the terms carefully and sign if you agree. After that, the lender should transfer the money to your bank account within a few business days.
- repaying your loan. Make sure you pay back your signature loan as promised. If you make late payments, you may pay a late fee and this could damage your credit rating, making it more difficult for you to borrow in the future. Sign up for automatic payment or use a spreadsheet to keep track of your due date.