Commonly known as a ‘good faith’ loan, a signature loan is a type of loan provided by financial companies or banks on the basis of the signature of a borrower with the collateral being his/her promise to repay the loan.
Signature loans are just like an IOU that are backed by nothing more than the borrowers word/promise to pay back. They are fast becoming a popular method of taking loans and growing to be more accessible in the advanced digital era.
People who require cash for buying something that is not within their financial reach can opt for a signature loan. They are simple to avail and plan for repayment, thereby making them the ideal type of loan during times of financial stress.
The Purpose of Signature Loans
Signature loans are a kind of personal unsecured loan that is typically repaid in full in fixed monthly installments over a fixed time period. As per the creditworthiness of the borrower, such loans normally come with fixed rate of interest and tenure of a few months to not more than five years.
Individuals should have a stable job and income and good credit to be able to take out a signature loan. As there is no collateral, regular income and good credit help determine the ability of the borrower to repay the loan. People who do not have a good credit can get someone else (family, friends, etc) with good credit to co-sign the agreement and subsequently qualify for a signature loan.
A signature loan can be taken out and used for many different purposes, including debt consolidation so as to avoid high interest rates and save money; a wedding or a vacation; for buying a car in case you cannot get a low interest auto loan; or for home repairs and renovation if a home equity loans fails to get approved.
Pros and Cons of Signature Loans
Some of the benefits of signature loans are:
- No need for collateral: Signature loans are offered without collateral and thus you do not have to worry about losing your car or house in case of difficulties in repayment of the loan. Individuals who do not own a house or a car generally cannot qualify for any other kind of loan, and hence signature loans are a good option for them.
- Convenient and quick: Lenders verify only a few things before approving a signature loan. Thus the application process and distribution of funds is fast, which can be really convenient during times of immediate cash requirement.
- Short-term: Signature loans come with short repayment tenure of a few months to 4 to 5 years. Thus, borrowers can repay fast and experience less risk. Long term loans lasting for 10 years come with risk of excessive borrowing of funds and using it for things not intended, thus increasing the overall financial burden.
The disadvantages of signature loans are:
- People with bad credit may not qualify for a signature loan as lenders will deem them to be very risk. Even if people with bad credit can avail of the loan, it will usually be approved with a very high interest rate.
- Even for people with good credit, signature loans come with interest rates that are higher than other kinds of loans.