A signature loan is a loan given based on the strength of a person’s signature. There is no collateral required. The loan is given on the basis of the promise made by the borrower to pay. This is also known as a good faith or a character loan.
Is a signature loan an unsecured loan?
A signature loan is a type of an unsecured loan. It is unsecured because it is given without any collateral. The loan is given without any collateral or security. On completion of payment of the loan, the loan account is closed.
Why do people take these loans?
Signature loans are essentially personal loans. They can betaken for a variety of reasons:
- To meet emergency expenses
- To pay medical expenses
- To clear off any overdue loans
- To pay off credit card bills
- To take a vacation
- To purchase something of value
- For home improvement
Earlier signature loans were taken by those with poor credit. These loans would carry higher interest rates. But today interest rates have fallen and even those with good credit are taking signature loans.
How much can you borrow?
The amount that would be loaned would depend on various factors. Generally, an amount of anywhere from $5,000 to $50,000 would be given. The higher loan would be given to those with a better credit score. Those with lesser credit would have to settle for a lesser loan amount.
How are signature loans given?
A signature loan is given without any collateral. This is a risk for the lender. If the borrower defaults on the loan, then since there is no collateral, the lender may find it difficult to recover his money. So, there are certain things the lender would verify before approving a signature loan. They are:
- Credit: Since the loan is unsecured, one factor the lender would verify is the creditworthiness of the borrower. If the borrower has a good credit score, it is indicative that he repays loans on time. This is an assurance for the lender. To get a signature loan, the borrower must have a fair or good credit score. Those with a poor credit score are unlikely to get a signature loan.
- Adequate income: In order to qualify for a signature loan, you need to have an adequate income. Since there is no collateral, the lender has to be assured that the borrower can repay the loan. A borrower who has a sufficient income would be able to repay the loan. The lender would thus verify income-related documents before approving a signature loan.
- Low debt: Existing debt or loans taken by a borrower needs to be less in amount. If already a borrower has high debt, then an additional debt would put a burden on his finances. Repaying the new loan as well as the additional loan may be difficult, so it would be difficult to get a signature loan with high existing debt.
- Assurance against default: The lender must be assured that the borrower will not default. Having a permanent address or having children studying in local schools is an assurance for the lender against default.
A lender would look for these factors before approving a signature loan.
A signature loan is a loan given on the strength of the borrower’s signature. This is known as a good faith loan and is given based on factors like good credit and adequate income.