Signature Loans: Everything You Need to Know (And More)
Need cash quickly?
There's a lot to choose from when it comes to borrowing money. From high-interest credit cards to borrowing from friends or family, you can get yourself into a sticky situation pretty quickly.
One option to consider is a signature loan.
Signature loans allow the borrower to pay for a number of things that are not really covered by the scope of other types of loans.
If you're considering a signature or other type of loan--be careful. Debt is easy to get into but can be hard to get out of. Just remember that the average American has over $16,000 in credit card debt alone.
Keep reading for an in-depth look at these loans and why they might (or might not) be a good option for your financial situation.
What Are Signature Loans?
A signature loan is a type of personal or unsecured loan.
Unlike borrowing money for a car or a house, these loans do not require the borrower to put up anything as collateral.
Your bank or lender simply uses your credit score as an indicator of your ability to repay. As the name implies, a signature loan relies heavily on your "signature" as a sign of your commitment to repay the amount borrowed.
What Are Signature Loans Used For?
Since you're not borrowing for a specific purchase (like a car), these loans can be used for just about anything.
Here are a few common reasons for taking out a signature loan:
- Debt consolidation
- Vacations, or holiday expenses
- Home improvement projects
- Unexpected financial expenses
- Major purchases
Signature loans can be a great way to consolidate debt and reduce the amount of interest you're paying across the board.
Know Your Terms
Since these types of loans are unsecured, the terms can vary widely. So make sure you understand what you're signing up for.
Terms typically range from 2 to 5 years and interest rates vary widely. The loan amount can also vary depending on your credit history and your lender.
Just like you would with any other major financial decision, make sure you do your homework. If you're serious about this type of loan, there are lots of options--make sure you explore all of them.
Getting approved for a signature loan may be a little more work for many borrowers.
Much like a credit card, you're not putting anything up for collateral, so if you can't make the payments it is much harder for the lender to regain their money.
If you want to get approved for a loan like this, you will likely need to have decent credit. Having a co-signer or co-borrower may help you out as well if you don't have a sufficient credit report or history.
Pros of Signature Loans
Here are a few of the biggest pros of taking out a signature loan:
1. Use Your Money Your Way
One of the biggest pros for a signature loan is that it puts cash in your pocket that you can use for a variety of expenses.
Sudden or unforeseen expenses may be difficult to pay with a credit card but could be possible with a check or cash. Or you may simply not want to use a credit card.
2. Consolidate Debt
Another big pro for this type of loan is debt consolidation.
If you have several credit cards or other loans you're trying to pay off, putting them all together in one loan may help you to pay everything off more quickly or just give you a much needed lower payment.
3. Reduce Interest Rates
The interest rates for credit cards are not pretty. Most credit card holders are shelling out nearly 17% in interest each month. Those kinds of rates can make it tough to pay down your cards.
Many of these loans offer rates much lower than credit cards, allowing you to pay them off much more quickly.
Signature Loan Cons
Just like anything else, there's usually a downside. Fortunately, there aren't many to signature loans. Here are a few of the cons associated with these loans:
1. Not Ideal for Those With Poor Credit
The nature of these loans makes them tough for people with low credit scores or minimal credit history to qualify for.
If you're not sure where you stand, check your credit score before applying. Many lenders advertise the minimum credit score they'll accept.
2. Added Fees or Early Payoff Penalties
These concerns come with any loan, signature loans are no different. Just be aware of these potential downsides when applying.
Just like a mortgage, these types of loans can sometimes come with origination fees, so make sure you understand these fees (if any) before you sign.
The other thing to watch for is a penalty for early payoff. Most loans do not penalize you for paying them off early, but some do. Again, just be aware of these things before you take out a signature loan.
Signature Loans vs Credit Cards
If you've made it this far, you may be asking yourself: why not just use a credit card?
While many of the things discussed above could be paid for with a credit card, a signature loan offers a few advantages to borrowers.
For one, as we've already discussed, signature loans typically offer borrowers lower interest rates.
Secondly, a signature loan gives buyers a set term and payments. When your loan is paid off, you're done. Unlike a credit card which gives borrowers a revolving door of credit. This may be a better option for borrowers who are uncomfortable keeping credit cards around.
Putting It All Together
Think a signature loan is right for you?
Whether signature loans are a good fit for your financial situation or not, will depend on your needs and credit history. There are tons of lending options out there, even if you don't opt for a signature loan.
Need more information on all of the lending options available to you? Get in touch with us today. We're here to help