What Is a Signature Loan?

What Is a Signature Loan?

A signature loan is a personal loan of money from a financial institution that does not require collateral. The loan may be for any personal use, such as a family vacation, consolidating other bills or home repairs. A fixed number of equal payments are made to the financial institution to repay the principal sum borrowed plus interest. Personal signature loans enable people to buy what they want without saving the money first.

Time Frame

Signature loans are unsecured personal loans. Most banks offer terms from 12 to 48 months on this type of personal loan. An individual financial institution's guidelines, as well as the payment amount that the borrower is comfortable making each month, will determine the length of each individual's loan.

Size

While each financial institution varies slightly in loan options, the most common amounts offered for signature loans are from $500 to $25,000. The bank will look at the borrower's credit rating and ability to repay to determine the amount it is willing to loan. The financial institution will verify income and employment to determine the borrower's ability to repay the loan.

Considerations

Signature loans are a common offering among Internet financial institutions. These financial institutions are willing to loan money to almost anyone willing to pay their high interest rates regardless of credit. Local banks may also offer Internet loan applications, telephone applications and handwritten applications with more personal service. However, local banks may have a stricter lending policy eliminating high-risk individuals from eligibility. Automatic monthly payments deducted directly from your bank account can help you make payments on time.

Benefits

Paying your signature loan each month as agreed upon will help to increase your credit score. Should you default, the financial institution has nothing to repossess, though your credit score will lower. Because signature loans have a fixed term, you will know when your balance will be paid in full. This makes them preferable over credit card debt to most people especially since the interest rate is usually a little less.

Warning

Signature loans to those individuals with poor credit may be more than 2 to 3 times what others will pay. Financial institutions willing to make these loans may also charge application fees that result in a higher effective interest rate. Be sure to read all the details before you sign your name. Interest paid on signature loans is not deductible on income tax returns.

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