What is a signature loan, and what does it include?

What is a signature loan? Learn when and how to use signature loans to make informed financial decisions.

When it comes to borrowing money, there are various options available, each with its own terms and conditions. One such option is the signature loan. Unlike loans secured by collateral, a signature loan relies solely on your promise to repay. Let’s explore what signature loans are and how they can be beneficial for your financial needs.

What is a signature loan vs personal loan?

A signature loan — sometimes known as a “good faith loan” or “character loan” — is a fixed-rate personal loan backed by the borrower’s signature as the promise to pay. Banks and financial companies offer signature loans if they deem the borrower has enough income and a good credit history. The interest rates on this type of loan are typically higher than other forms of credit due to the lack of collateral. Learn more about signature loans and when you might consider using one.

What’s a signature loan typically used for?

So, what’s a signature loan typically used for? Relying solely on the borrower’s promise to repay signature loans can be used for:

• Debt consolidation. This involves combining multiple debts into a single loan for easier management.

• Emergency expenses. This covers unexpected costs like medical bills or car repairs.

• Home improvements. This is for financing renovations or repairs without requiring collateral.

• Education costs. This is used to fund tuition fees and living expenses for college or vocational training.

• Weddings or special events. This is used to finance celebrations without relying on high-interest credit cards.

However, it’s important to note that signature loans should not be used for investments, illegal activities, gambling, or luxury items.

Pros and cons of a signature loan.

Before opting for a signature loan, it’s important to weigh its advantages and disadvantages. Signature loans offer quick funding, no collateral requirement, and flexible use of funds, with fixed monthly payments that can aid in budgeting. With this in mind, borrowers should be aware of potential fees and high interest rates, especially for those with lower credit scores. Understanding these factors is essential in determining if a signature loan aligns with your financial needs. Here are the pros and cons of a signature loan:

Pros

• Quick funding, often available within a short period.

• No collateral needed, reducing the risk for borrowers.

• Flexible use of funds for various purposes.

• Fixed monthly payments, making budgeting easier.

• May help build or improve credit history if payments are made on time.

Cons

• Lenders may charge fees such as origination fees or prepayment penalties.

• Potentially high interest rates, especially for borrowers with lower credit scores.

• Limited loan amounts compared to secured loans.

• Approval is based on creditworthiness, so borrowers with lower credit scores may face higher interest rates or rejection.

• Defaulting on the loan can damage credit scores and lead to collection efforts by the lender.

What to know about signature loans.

Who uses a signature loan and why?

Historically, people with low credit scores tended to take out signature loans. However, with lower interest rates and higher loan maximums, many people with good credit are also starting to take out signature loans for anything from home improvements to unexpected expenses. This type of loan can also be a great way to consolidate and pay off debt if you qualify for a signature loan with a lower APR than your combined debts.

Who is eligible for the signature loan?

Since signature loans are considered “unsecured,” with your signature being the only collateral, lenders want to ensure your ability to repay. They’ll review the documents needed for the loan, examine your credit score and history, and debt-to-income ratio before approving your application.

How does signature loan payment work?

You’ll receive the loan all at once, and then repay it in monthly installments over a set repayment term. Note that these loans come with a fixed annual percentage rate, which includes interest and fees, meaning your payments won’t change over time — but those payments will include interest.

What is an open-end signature loan?

An open-end signature loan is a type of revolving credit that allows borrowers to access funds up to a pre-approved credit limit. Unlike traditional installment loans, which provide a lump sum of money upfront, open-end signature loans allow borrowers to borrow, repay, and borrow again repeatedly, much like a credit card.

Make sure you talk with legal counsel before making any financial decisions about signature loans.

Simplify the loan process.

Learn more about how you can use Adobe Acrobat to simplify your electronic banking, easily e-sign documents and securely manage your loans.