What Is a Signature Loan And How Does It Work?
If you need a loan that will not make you risk putting up your car or house as collateral, then you should consider having a signature loan. Signature loans can provide you fast cash for your projects, but you have to tread carefully over high-interest rates and fees that accompany the loan based on your income, credit scores, and credit history.
What Is a Signature Loan?
A signature loan as the name implies is a good-faith loan that is backed by your signature without any form of collateral. It is an unsecured personal loan with fixed rates and can be offered by a credit union, online lender, or bank.
It is basically called signature loans because it only requires your signature to secure the loan, and the payment amount for all installments is usually the same over the period of time the loan is to be cleared. But you must have had very worthy credit to get you approved.
And if for any reason, you default on your loan repayment, your house, car, and other investment accounts aren’t at risk. You’ll only damage your credit scores and credit history, and information like bankruptcies can stay on your reports for up to a decade, and nonpayment of a loan can be recorded on your credit reports for up to seven years. This can result in some higher interest rates and may also cause you not to get approved for future loans.
So, even though you do not have to provide any collateral for this kind of loan, it should stay up with the repayment to avoid dealing with financial repercussions over a long period of time.
How Do Signature Loans Work?
Signature loans are often referred to as unsecured loans because they are not ‘secured’ by any form of collateral. Collaterals are things of value like your house, savings account, or car that is provided as a commitment to the loan, and which the lender can repossess if you fail to repay the loan.
On the other hand, loans that welcome collaterals as a security for them are called secured loans.
Signature loans are only offered to you based on your past reputation on loans and are only secured by your signature. After providing your signature, your prospective lender will offer you the full approved loan amount in one single payment, either by check or bank deposit into your bank account. The limit of a signature loan can be several hundred to several thousands of dollars.
Once the loan is provided, your repayment will be expected to come timely and steadily until the total loan is paid. Usually, it lasts between one to seven years.
Signature Loan Costs
There are some costs that signature personal loans may come with, and some may be required upfront while others may be added to your repayments each month.
Not all signature loans require origination fees, but if you are taking a huge sum of money or already have damaged credit, then it may be required from you. And it is often taken out of the proceeds of your loan as a percentage.
So, if you are applying for a loan amount of $10,000 with a 3% origination fee, you’re not going to receive the full amount you applied for, but $9,700 with $300 as origination fee is deducted from the full amount you requested.
When you repay your loan each month, the loan amount is split into ‘principal’ and ‘interest’. The principal is meant for the actual loan repayment, while the interest is the portion that goes to the lender.
When applying for most loans, the biggest cost is often the loan interest. The more reduced your interest rate is, the less you’ll have to pay to the lender with each payment. More of the payment will be going towards sorting out the loan amount. So, it is often advised that you pay more attention to the interest rate of a signature loan. Your total loan cost will be shown in your annual percentage rate (APR).
If you do not make your full payment on the due date, most lenders will request late fees which may run up your repayment amount. Another fee that may be required is “prepayment penalties” stated to pay your loan off early on other sites. But this is not common with reputable lenders.
Most lenders may also charge for rolling your current loan into a new loan if it appears that you’re unable to afford it.
Where Can You Get Signature Loans?
Signature loans can be gotten from online lenders, credit unions, or traditional banks. They may range from $1,000 to $100,000 for different borrowers. Borrowers who have great credit history may be provided more options, but the rates from credit unions or banks can be higher.
When you apply for these loans, you’ll likely get paid on the same day or the following business day. But you are not likely to receive unsecured personal loans from all banks, but some make provision for borrowers who already have good credit with huge loans. Also, you may have to be a current customer with the bank you are applying with to receive most perks like receiving higher loans or qualifying for a rate discount.
You’ll likely get unsecured personal loans ranging from $250 to $50,000 with credit unions. They may offer you more flexible terms with low rates, unlike other lenders. And you’ll need to become a member of the credit union before you can be provided a loan.
Payday lenders also provide loans with no collateral and are technically categorized as signature loans. But they are highly expensive and do not help in building credit. Besides, they also put out some shady business practices.
How To Apply For A Signature Loan
Signature loans are pretty one of the easiest to consider. This guide should help.
Before you finalize a signature loan, make an extra effort to shop around for the most affordable loan with the most reduced APR. One of the best ways you can do this is by prequalifying. And it often includes filing an application, submitting a soft credit check, which will not cause any damage to your credit. The lender will thereafter display the amount you may be eligible for.
If you prequalify to more than one lender, you’ll have more options to compare with, especially since it really does no damage to your credit score.
After deciding your preferred offer, go ahead and submit your application. What each lender requests on the applications aren’t always the same, but generally, information like your personal details, contact information, Social Security number, information about the loan you are applying for, the purpose of the loan, and desired repayment.
After submitting the application, the lender will conduct a hard credit check, and will possibly bring down your credit score by some points. Several lenders’ applications and processes of approval are online. But credit unions and banks will likely require that you visit a branch. Once approval is done, you could get the money paid as quickly as the same (business) day or within a week – depending on the individual lender.