If you’re looking to take out a loan and don’t want to put up collateral such as a house or car, a signature loan might be a suitable option. But what is a signature loan, and how does it work? Essentially, a signature loan is a type of unsecured loan that allows you to receive a sum of money by simply providing your income information, credit history, and signature – hence the name “signature” loan. In this article, we’ll go into detail on how signature loans work, what they can be used for, how to apply, and their pros and cons. Here is an overview of what will be covered:
- How does a signature loan work?
- What are signature loans used for?
- How to get a signature loan
- Pros and cons of a signature loan
How does a signature loan work?
In order to be approved for a signature loan, you will need to meet the income and credit thresholds that the lender sets out. The fixed interest rate of your signature loan will depend on this information – the greater your income and credit score, the more likely you are to receive a favorable interest rate. If you are approved for a loan and accept the offer, you will be given a sum of money soon after signing your loan agreement. This money can typically be used for a wide variety of purposes including emergency expenses, debt consolidation, or home improvement. The repayment time frame for a signature loan can be anywhere from a few months up to five years – but generally, signature loans have a short repayment schedule.
How much can you borrow with a signature loan?
Lenders use your credit history and income to calculate how much money they will lend you. Because signature loans are “unsecured loans” and don’t require any collateral from the borrower, it makes them a riskier loan type for lenders than secured loans. As a result, signature loan amounts tend to be smaller than loans where collateral is used.
What’s the difference between a signature loan and a personal loan?
A personal loan is a sum of money that is borrowed from a bank or lender and then paid back in installments over the course of months or years. Personal loans can be either secured or unsecured. A signature loan is a type of personal loan and has a few specific characteristics: It is an unsecured personal loan, and it requires a high credit score in order to be approved. As a result, it is more difficult to be approved specifically for a signature loan than it is to be approved for the broader category of a personal loan.
What are signature loans used for?
Part of the appeal of signature loans is their flexibility. They’re helpful in a variety of situations since they can be used to pay for a number of different types of expenses. Let’s look at some common reasons to get a signature loan.
Emergencies
Unexpected expenses are an unavoidable part of life. A signature loan can be used to cover emergency repairs to a home or car, or to pay for surprise medical bills. Receiving money in a signature loan allows you to pay for these issues right away, and then repay the money slowly over time.
Life events
Significant life events—like a wedding or relocation to a new home—can be accompanied by a temporary increase in spending. A signature loan can provide the extra money necessary to make this sort of big life change possible. However, it’s important to be cautious and map out a budget that will allow you to also pay the loan back on time.
Debt consolidation
If you currently have high interest loans or significant credit card debt, a signature loan can be a productive way to consolidate your debt and also pay less in total interest.
How to get a signature loan
If you are a suitable loan candidate, the steps for getting a signature loan are usually straightforward. By being prepared ahead of time, you’ll help to ensure a smooth and speedy application process.
Understand your credit score
Your credit score is one of the primary pieces of information used to determine whether you should be approved for a signature loan. So, it’s important to review your credit score and credit report before applying for a loan. You’ll want to make sure that your score is high enough for consideration, and also check for any credit errors.
Collect all important information
Information about your income factors heavily into signature loan approval. Make sure that you have pay stubs and W-2 forms on-hand, as you will likely be asked for these documents in order to confirm your employment status and income. It’s also a good idea to have documentation that shows whether you rent or own your home, and what your monthly cost of housing is.
Assess your loan options
Applying with multiple lenders allows you to compare loan terms and choose the one that is the best fit for your situation. However, applying for a loan can result in a hard inquiry on your credit, which will in turn impact your credit score. So, if you plan on applying for a loan with several lenders, it’s best to complete all applications within a few weeks. That way, the hard inquiries will be treated as a single inquiry.
Double-check & sign loan
Before you sign a loan agreement, be sure to scan the document closely and ask any last minute questions that you might have. It’s a good idea to re-read all the fine print. Prepayment penalties, origination fees, late payment fees, and automatic withdrawals all have the potential to affect how much you pay over the course of your loan. If you see any of these terms present in the agreement and haven’t already discussed their impact with your lender, it’s a good idea to do so before signing.
Accept loan & start repayments
Once you have signed your signature loan agreement, you can receive funding in your account as soon as the same day. To get started on the right foot, make a note of the first repayment date – and for extra peace of mind, consider setting up automatic payments.
Pros and cons of a signature loan
While a signature loan can be beneficial in many situations, they come with their pros and cons. Consider these benefits and drawbacks before you make a decision:
Pros:
- You don’t need to put up any collateral. If you don’t have assets like a house or car—or simply don’t want to use them as collateral—you won’t be required to with a signature loan.
- Fast source of funds. Within as little as 24 hours, you can have access to the money you need.
- Lower rate of interest than most credit cards. Rather than putting a significant purchase on a credit card, you may ultimately be able to save money by using a signature loan to pay for it instead.
Cons:
- Possibility of high interest rate. If you have poor credit, a signature loan may not be a great choice as it could be offered at a high rate of interest.
- Fees. While terms vary by lender, some charge fees such as origination fees (money due at time of signing loan), late fees, or prepayment fees (if you pay the loan back ahead of schedule).
- Credit score damage. If you fail to make timely payments on your signature loan, it will have a negative effect on your credit score.
The bottom line
At Sun Loan, we’re proud to offer a wide range of personal loan options – including signature loans. It’s our mission to provide you with a loan that meets your needs and budget. Learn more about our loan options here.
