Exploring the Pros and Cons of Signature Loans vs Personal Loans

Exploring the Differences Between Signature Loans and Personal Loans

The ins and outs of handling personal budget management can sometimes be confusing. However, knowing about essential financial tools like signature loans can make all the difference. This article will explain what signature loans are, how they operate, and signature loans vs personal loans and how you may make the most of them.

Key Highlights

  • Signature loans are unsecured personal loans that depend on your creditworthiness.

  • Signature loans provide a lump sum on a specified term.

  • There are some personal loans that are not signature loans, but all signature loans are personal loans.

Understanding The Basics: What Is a Signature Loan?

Signature loans, which can also be termed "Personal Loans," are the kind of unsecured loans that you can get from different areas, such as banks, online lenders, and credit unions. The only thing that you need to sign is that you accept to pay back the cash. This is what the term "signature loan" means. 

There's no collateral like a car or investment account involved here. For instance, they can be a great tool to consolidate and pay off high-interest debts. But how do these loans work in practice?

The Working Mechanism: How Does a Signature Loan Work?

When you apply for a signature loan, the bank looks at your credit history and financial stability. If you fit their mold, they extend an offer. You get the full loan upfront and pay it back over a set period.
See, signature loans stand out from the crowd due to their steadiness - both in interest rates and repayments. 

  • For instance, have you ever felt like your high-interest debts seem like a mountain that keeps growing? A signature loan could be just the hiking gear you need.

Signature loans are different from other types of loans in that the entire loan amount is given to you at once if your application is approved. Loans are typically repaid over a period of time, anything from 24 months to 60 months or more.

An Example of a Signature Loan

Imagine that one friend of yours - the one who loves shopping just a bit too much. Credit card debt is piling up like laundry, with skyrocketing interest rates between 12% to 20%. Enter the signature loan. 

They apply, get approved, and bang - consolidate all that debt into a single lump sum at a fixed interest rate of 7%. They've combined their loans into one low-interest payment. A personal loan calculator will assist you in calculating the loan amount's interest rate and monthly payment.

Difference Between Signature Loans and Personal Loans

While both personal and signature loans seem like twins, a key difference is the collateral requirement.

  • Signature loans don't require any collateral - your word is your collateral. That means even if you hit a repayment hiccup, the lender can't seize your stuff. But getting approved needs a solid track record: stable income and a decent credit score (typically 670 or more).

  • On the flip side, there are two types of personal loans: unsecured and secured. For approval, you may need collateral if your score on the credit score is low.

Where can you get a signature loan?

Are you wondering where to shop for your signature loan? Online lenders, traditional banks, and credit unions have got you covered.

Online Lenders: The Convenience Route

Online lenders are like the Amazon of signature loans. Whether you have splendid or rotten credit, they might have something for you. Quick application, broad range - what's not to like? Online lenders offer the money between $1,000 and $100,000. It means people who have bad credit can get help from online lenders. All you need is to fill out an online application to receive the loans.

Banks: The Traditional Route

Banks favor you if you have a good credit score (think 690+). Often, good deals like lower rates or bigger loans are reserved for existing customers. Banks offer you between $1,000 and $100,000 of money. You must already be a customer with the lender to take some loans. Such customers usually get the best offers, like loans with lower rates.

Credit Unions: The Community Route

Credit unions are friendly neighborhood lenders. They're exceptionally accommodating towards those with lower credit scores. But you have got to join the club first. Credit unions typically offer unsecured personal loans ranging from $250 to $50,000, a boon particularly for individuals with lower credit ratings (689 or lower). Their loan terms are often more lenient, featuring lower rates compared with other lenders. 

Does a signature loan require a credit check?

Usually, yes, a hard one. But, some lenders might offer soft credit checks at the application stage. A signature loan without a credit check is a payday loan. Many lenders are still prepared to work with clients who have bad credit if you need a loan but are having trouble with your credit score.

What credit score do you need for a signature loan?

This is not always the case for people who want to get a signature loan. Try hitting a score of at least 600 for a smooth sailing application process. Note: A "Good' credit rating leads to 'Lower' interest rates.

How long does it take for a signature loan to get approved?

Typically, 1-3 days after approval. But don't fret if it takes longer due to missing documents or considerations. That means your application has been received, and all the relevant documents have been examined. If any papers still need to be included, this process could take longer than one day.

What are the benefits of a signature loan?

The real draw of a signature loan is it's a no-collateral zone, making it faster to get approved, provided you meet the lender's criteria. Plus, it can save you from high-interest debts like credit cards.

  • Suppose you meet the financial institution's application standards. In that case, a signature loan can be handled and authorized more quickly because no collateral is involved. Additionally, it can help you save money on interest-bearing debt of the following kinds: Even if secured loan options have lower interest rates than those of signature loans, the former can nevertheless significantly lower your overall interest payments when compared to credit card interest rates.

How long do you have to pay back a signature loan?

Around 2 to 5 years are needed to repay the signature loan. For that, you have to make monthly payments to repay the amount. Credit card loans ordinarily last for six years, while student loans last for ten years. On the other hand, it will take a longer time when your repayment plan is income-driven.

The Pros and Cons of Signature Loans

Before you decide to secure a signature loan, it's crucial to understand the potential advantages and drawbacks:

Pros of Signature Loans

  • Fast Funding –Need cash quickly? Some lenders may release your funds on the same business day or a few days post-approval.

  • No Collateral –As signature loans are unsecured, you don't need to risk your assets as collateral.

  • Lower Interest –Typically, personal loans have lower interest rates than credit cards. For instance, as of November 06, 2023, the average personal loan interest rate stands at 11.43 percent.

Cons of Signature Loans

  • Additional Fees: Certain lenders may charge fees for loan origination, late payments, and prepayment penalties, which can significantly inflate your borrowing costs.

  • High Interest Rates: Borrowers with poor credit might face steep interest rates from lenders. Some lenders even advertise rates topping 30 percent.

  • Credit Score Impact: Late payments can severely impact your credit score, making loan approvals more challenging in the future.

How is a signature loan different from a personal loan? 

Aren't personal loans and signature loans basically the same thing? Some personal loans are not signature loans, but all signature loans are personal loans. 

A "personal loan" may refer to different types of loans, such as loans with varying rates, loans with or without collateral, and loans to consolidate debt. No collateral is necessary for getting money through a signature loan.

Final Words

Signature loans can be a valuable financial tool when managed responsibly and taken out with full knowledge of their implications. They offer quick funding, require no collateral, and lower interest rates than credit cards. 

However, it's crucial to stay cautious as higher borrowing costs due to fees and potential credit score damage due to late payments present serious risks.

Remember, always make an educated decision by comparing offers across different platforms, whether they're online lenders, banks, or credit unions. Prioritize your financial health, and only borrow what you can repay comfortably.

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06 Nov, 2023

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