What is a signature loan?
Signature loans are unsecured personal loans offered by banks, credit unions, and other financial institutions. Instead of relying on the applicant’s assets as collateral, a signature loan relies on a borrower’s signature as a promise to pay. Alternative names for this type of loan are good faith loans or character loans.
For borrowers, having no collateral at risk is one of the main benefits of signature loans. Borrowers get quick access to funds, with minimal paperwork or required documentation. Borrowers can use the funds for any purpose they wish, including paying off high-interest credit card debt, making home improvements, or covering unexpected expenses.
Because the lender assumes more credit risk with signature loans than with secured loans, they come with relatively high interest rates and shorter terms, from a few months to less than five years. Stiffer credit requirements mean these loans don’t work for every borrower.
Lenders typically examine their relationship with an applicant and an applicant’s character and ability to pay as the main reference points when deciding whether to grant signature loans. They look for high credit scores, minimal debt loads, and sufficiently high income levels.
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Signature loan example
Getting a standard personal bank loan can require a week or two as the bank runs a credit check on a borrower and considers whether or not she qualifies for a loan. Meanwhile, signature loans are deposited in the borrower’s bank account within days. With a credit card, borrowers are tempted keep making purchases and adding debt, keeping them stuck in the debt cycle. With a signature loan, there is a single lump sum paid out, with no option to add to the debt later. This can be useful for imposing discipline on borrowers looking to pay off other balances.