Life is unpredictable, and you’re likely to find yourself in need of a large sum of money at some point in your life. A signature loan can be the right choice if you want a loan without collateral, and the money can be used for any purpose you desire. Moreover, you can obtain your money quickly, as some lenders deliver funds the same business day.
Nevertheless, these loans have drawbacks, like any other financial instrument. Some lenders might charge you a high-interest rate along with the costs. Make sure to examine the specifics of these loans before you apply to ensure a signature loan is suitable for you.
What is a Signature Loan?
A signature loan helps you obtain a personal loan without collateral. As the name suggests, the loan is based on your word or signature, stating that you will repay the amount owed in full. The money can be used for almost anything, but unexpected medical costs and debt consolidation are among the most common reasons for obtaining a signature loan.
In general, lenders charge a higher interest rate for unsecured loans than for secured loans such as auto loans and mortgages. Compared to credit card interest rates, signature loans sometimes have lower interest rates.
Besides, loan funds can be utilized for any purpose, including medical emergencies, debt reduction, and significant life events.
How Do Signature Loans Work?
Since collateral is not required for signature loans, lenders will carefully assess your income, credit history, and credit score before approving your credit. A signature loan is a payment of a set monthly amount with a fixed annual percentage rate (APR). Every month, your payment will be the same amount.
Furthermore, unlike credit cards, signature loans include repayment terms, so you know exactly when you will complete repaying your debt. Signature loans are available for a variety of periods, from 12 months, which are short-term loans, to 15 years, which are long-term loans.
How to Obtain a Signature Loan?
The application procedure for a signature loan is similar to that of a personal loan. Below are the actions to be followed:
- Review your credit score: Before submitting a loan application, you must check your credit score to determine which lenders will approve you. Additionally, it could assist you in estimating the interest rates that you might be qualified for.
- Make a financial plan: It is advisable to borrow only what you can afford. A basic budget plan will help you determine how much you can pay monthly. You can use a personal loan calculator to determine the rough value of your monthly payments.
- Apply to over one lender: If you match the criteria of applying for a personal loan, you can check for the possible offers from lenders. Even if they won’t be firm offers, they can give you an overview of what to expect without affecting your credit score.
- Submit a loan application: After choosing a lender, you need to complete an official loan application and have the information verified. Your lender can request bank statements, W-2s, paystubs, and copies of your identification. Your lender might also do a hard credit pull to get a complete view of your credit history.
- Sign the loan and get the funds: If your application is approved, a lender will send you a loan agreement to obtain your signature. Carefully read the terms and indicate your agreement by signing. The lender will then send the money to your bank account within a couple of business days.
Where to Obtain a Signature Loan?
Depending on your preference, you can apply for signature loans online or in person. Below stated are a few popular places to locate a signature loan.
- Credit unions: Personal loans from credit unions frequently come with reasonable APRs, which are capped at 18%. Indeed, you will need good credit, much like banks, to qualify. Before you receive a loan, credit unions ask you to become a member.
- Banks: Despite having more strict qualifying conditions, banks offer attractive loan amounts, APRs, terms, and bonuses. Generally, a good and positive credit history is considered a requirement for obtaining a signature loan from a bank. Moreover, you must be a current bank customer.
- Online personal loan providers: Unlike banks and credit unions, online lenders have fewer strict credit standards and may consider other factors when approving personal loans. However, you are likely to pay extra interest with an online lender.
Pros & Cons of Signature Loans
Even though certain borrowers mostly find great success with signature loans, this type of loan may also have drawbacks.
Pros
- Since this loan does not require collateral, your lender won’t be able to take your possessions if you default.
- You can receive funds in as little as one business day, based on the lender.
- If your lender sends information to the credit bureau, it can help in credit-building.
Cons
- You may have to pay origination charges. Depending on the lender, this could be anywhere up to 12%.
- An APR of up to 36% can be charged if your credit is poor.
- Your credit score can be negatively affected if you miss or make late payments.
