When you want to borrow money, it's important to find the right type of loan to take out. Signature loans are one borrowing option you may have available to you.
The following are six characteristics of a signature loan.
1. A borrower only needs to give their signature and promise of repayment to take out these loans.
There is not much required of the borrower once he or she is approved for a signature loan. The borrower simply needs to sign a loan contract and make a promise to repay the loan. Then, the borrower is expected to begin repayment and finish paying the loan off by the end of the loan term.
2. They are also sometimes referred to as character loans or "good faith" loans.
There are numerous names that a signature loan can go by. Consumers need to recognize these other names so that they know when the financial product they're being offered is a signature loan. In addition to being called signature loans, these loans are also sometimes called character loans or "good faith" loans.
3. They don't require any collateral.
One of the most important characteristics of a signature loan is that these are unsecured loans that don't involve any collateral. The fact that no collateral is required can be an advantage for the borrower. This can help a borrower who doesn't have any collateral to offer. The fact that there is no collateral also minimizes risk for the borrower because the borrower doesn't have to worry about risking a valuable possession if he or she has trouble making payments.
4. They typically require the borrower to have decent credit.
Because there is no collateral, the borrower's credit history is important when he or she applies. The lender is relying on the creditworthiness of the borrower. Therefore, the lender will look at the borrower's credit report. Borrowers with low credit scores are unlikely to be approved for these loans.
5. They may involve higher interest rates than secured loans.
When a borrower puts up collateral for a loan, the collateral secures the loan and reduces some of the risks for the lender. Without collateral, there is more risk for the lender. The lender may compensate for this by charging higher interest rates than would be charged on a secured loan.
6. They can be used for any expense the borrower chooses.
Another huge advantage of a signature loan from the perspective of the borrower is that loan funds can be used on anything the borrower chooses. The borrower isn't limited to a signature loan in the same way that he or she is with a secured loan. With a secured loan, the loan funds may have to be spent on a car or house for example.