What Is a Signature Loan and How Does It Work?

Nearly 84 million Americans have taken out some kind of a loan within the past year. 

If you’re in a financial bind, or if you’re looking for a way to consolidate your debt, you have lots of options when it comes to loan types. 

With so many choices out there, it can be tough to figure out which type of loan is best for your current financial situation, your credit score, your goals, and even how much you think you’ll make in the future. 

In this post, we’ll examine one of the most popular loan types on a deeper level: signature loans. 

What is a signature loan, what can it be used for, and what sorts of benefits does it offer when compared with other loan types? 

Keep on reading this post to find out.

What Is a Signature Loan?

First, let’s answer the most important question of all: 

What is a signature loan? 

When you apply for most types of loans, the lender requires you to put up collateral. For example, if you apply for a mortgage, the collateral is the home/property itself. 

If you fail to make your loan payments on time and in the correct amount, the lender can seize possession of your property or foreclose on your home. 

With an auto loan, the collateral is your car. 

Though collateral does help make lenders feel more secure, sometimes, it’s just not something you’re comfortable with. 

Enter signature loans. 

These are kinds of loans that don’t require borrowers to put up any kind of collateral when they apply for the loan. 

The name “signature loan” means that your signature alone is word enough that you plan to pay back the loan. In some cases, you might hear a signature loan referred to as a “good faith loan.”

Of course, the lender still needs a way to evaluate your ability to actually pay them back. 

So, instead of requiring you to put up collateral, they’ll examine your current credit score, your history of paying back past loans, and your current account statements. They’ll likely also ask you to prove that you have a current source of income. 

They’ll also evaluate your overall debt-to-income ratio. 

The Top Benefits of Signature Loans

There are many different reasons why borrowers are likely to apply for a signature loan aside from the fact that they don’t require any kind of collateral. 

First of all, you’re usually able to get approved for credit loans incredibly quickly. 

Especially if you’re facing a more serious financial emergency, this is an enormous benefit. 

Plus, signature loans are a type of installment loan. So, while you’ll get the money in a lump sum, you’ll have plenty of time to pay it back. You’ll pay a fixed monthly amount every month, covering both principal and interest. 

Knowing the exact cost of your loan every month makes budgeting much easier. 

Additionally, there are lots of signature loans that require no credit check.

This means that, while a lender will look at your current bank statements and likely require a letter of employment or another proof of income, they won’t run a credit check on you. 

If you have poor credit, not only can you often still get approved for signature loans. If you’re able to pay them back on time, you can also use them to help boost your overall credit score. 

One thing to be aware of? 

Often, signature loans do charge high-interest rates. Make sure you can afford to pay the interest rate over the life of the loan to avoid running into financial problems.

What Do People Use Signature Loans for?

Now, let’s quickly cover some of the most common reasons why people apply for a signature loan. 

As with a personal loan, signature loans allow the lender to be flexible with the way they choose to spend the money. 

Many people use signature loans to help pay for school, start their dream business, or even take a much-needed vacation. Others may use these loans to help them cover the costs of weddings and funerals.

Signature loans are also a huge help when you’re facing unexpected medical bills. 

You can even use the money you get from a signature loan to consolidate your existing debt. Couples also use signature loans to help finance their weddings. 

Just make sure you’re using the loan money for a true necessity — and not for an irresponsible indulgence that you really can’t afford. The best way to be able to treat yourself is to take a hard look at your budget and identify areas where you can reduce your spending. 

How Does a Signature Loan Work? Now, You Know

Now that you can answer the question, “What is a signature loan?” with ease, you’re ready to start the application process. 

Remember to get rates from as many different lenders as possible, and never be too intimidated to negotiate. 

If you still need to borrow money but don’t feel like a signature loan is your best option, don’t worry — you still have plenty of other types of loans to choose from. 

Want to learn more about them? 

Our blog is here to help you make smart financial choices. 

We also make it easy for you to find the best sites on a personal loan, a student loan, and credit card advice. Browse through our list of the top financial sites and get lots of different tips and opinions on how to borrow. 

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