A variety of loan options are available within the financial marketplace, including signature loans. A signature loan, also known as a personal or unsecured loan, is a type of financial product that only requires a signature and a promise to make payments.
What are Signature Personal Loans?
Due to the rise in online lending, which often features quick application and approval processes, signature loans have gained in popularity among borrowers. Borrowers can typically use signature loan funds for whatever purpose they like, such as debt consolidation, medical bills or vacation expenses. However, because a signature loan is a type of loan that doesn’t require collateral, it may carry a higher interest rate than a secured loan.
Types of Signature Loans
There are many different types of signature loans and none require collateral as a condition of approval. Here are some examples:
- Online loan
- Fixed-rate loan
- Variable-rate loan
- Installment loan
- Convertible loan
Requirements to Apply for a Signature Loan
The application process can vary slightly from lender to lender, but here are some general requirements you may encounter when applying for a signature loan.
1. Credit Score
Your credit score gives lenders a good idea of your credit history. In general, the higher your score, the less of a lending risk you may appear to be to a lender. Less risk can translate to better interest rates on a signature loan, which means you can save money.
2. Income
When you apply for a signature loan, it’s common for lenders to consider your ability to make payments on the loan. You may have to show proof of income, such as pay stubs.
The lender may also evaluate your debt-to-income ratio. DTI is determined by dividing the sum of your monthly debt payments by your gross monthly income. Lenders often prefer borrowers to have a DTI that’s 35percent or less when it comes to personal loans.
3. Payment History
Payment history weighs heavily on your overall credit score and can also be a factor when applying for a signature loan. While a solid record of on-time payments can build lender confidence in you – just one late payment will remain on your credit report for seven years.
Costs Involved with a Signature Loan
In general, borrowers with excellent or good credit scores qualify for more favorable interest rates and terms than borrowers with fair or poor credit scores. Higher interest rates equal a more expensive loan overall.
Other costs involved with a signature loan can include origination, early payoff and late payment fees. To get the best deal, borrowers may want to shop around as rates and terms can vary significantly between lenders.
- An origination fee is what the lender may charge to process the loan.
- An early payoff fee — also known as a prepayment penalty — could apply if you decide to pay off the entire loan before it’s due.
- Depending on the lender, a late payment fee may apply if you fail to make your loan payment on time.
Pros and Cons of Signature Loans
Just as with any financial decision, it can be helpful to consider the pros and cons before committing to a signature loan. Here are some to consider:
Pros
1. Convenience
Online lending options are available, whichallow borrowers to apply at their convenience.
2. Speed of Disbursement
Signature loans can often be applied for and granted in a short amount of time, which is helpful if a borrower needs money quickly.
3. Flexibility
Signature loans can often be used for whatever a borrower chooses, instead of having restrictions. However, it all depends on the lender.
4. Better rates than payday loans
Signature loans often feature better rates than payday loans — another type of unsecured loan.
5. Less risk
Signature loans are unsecured, so borrowers don’t have to worry about risking the loss of their personal property if they can’t make payments – however their credit scores will likely take a big hit.
Cons
1. Credit checks are required
A borrower with a lower credit rating may only receive offers for signature loans with high interest rates or be denied altogether.
2. Shorter repayment terms
Signature loans are typically set up for repayment within a few months or up to five years, which means that your monthly payments may be much higher than if you took out a lengthier loan.
3. Lower borrowing limits
Because signature loans are unsecured, loan limits tend to be lower than those of secured loans – generally between $3,000 and $35,000.
Monitoring Your Credit
The better your credit score, the better chance you may have at a competitive interest rate on a signature loan. Are you actively monitoring your credit scores for changes?
If not, a product such as ScoreSense provides credit reports and scores from all three credit reporting agencies. Plus, you’ll receive alerts and updates to make you aware of any changes that have occurred to your credit so you can address them.
If you’re not already taking an active role in monitoring your credit, why not get started now? Let us know your thoughts in the comments.
