What is a signature loan?
A signature loan is a personal loan that relies only on the borrower’s signature as collateral. Find out if a signature loan is right for you.
Ashley Eneriz
Can you use it for anything you want?
If you have a major expense on the horizon, you may be considering a personal loan. Whether you’re low on funds or you don't want to liquidate your savings, a personal loan can provide a lump sum of money that’s yours to spend as you please — including home improvement projects, medical emergencies, debt consolidation, wedding expenses and more.
The amount you can borrow and the loan's interest rate will depend on several factors, including your credit score, your debt and your income.
A personal loan is a short-term loan issued by a financial institution to a borrower. Repayment is typically over one to five years. Most personal loans have a fixed interest rate.
With this kind of loan, you make regular monthly payments until you repay the loan in full. As long as the personal loan has a fixed interest rate, you make the same payment each month for the length of the loan term.
When considering a personal loan, you'll want to be sure to distinguish between secured and unsecured loans. Traditionally, personal loans are unsecured, meaning you don’t have to use an asset as security, or collateral, for the debt.
There’s a variety of personal loans available, so understanding your options will help you find the one that best meets your needs.
Loans can be secured or unsecured. If you have a less-than-ideal credit score, you may have more success applying for secured loans because they reduce the lender's risk.
Typical forms of collateral for personal loans are vehicle titles, jewelry and cash savings accounts”
Loans may also come with a variable or fixed rate. It's essential to understand the difference to avoid being surprised if you take out a fixed-rate loan and your monthly payments change.
You might expect the interest rates on unsecured loans to be higher than those on secured loans; it’s riskier to the lender when they don’t have the option to seize collateral. However, this isn’t always the case. Lenders tend to market secured loans toward individuals who can’t otherwise qualify for unsecured loans, so you might find that they require collateral and have interest rates similar to unsecured loans.
Just as with any financial product, there are benefits and drawbacks to consider with a personal loan. Consider the following pros and cons as you decide whether a personal loan is appropriate for your situation.
One of the most significant benefits of personal loans is that you can use them for nearly any purpose. You might use the funds for:
Personal loans are versatile, but lenders can place restrictions on the use of the funds. You generally can’t use the money for:
Lenders typically ask for the reason for your loan. Your reason, in some cases, may also affect your interest rate.
The average interest rate on a personal loan varies depending on the lender, your credit score and the amount of money you borrow. Rates generally range from 6% to 36%. The average rate on a 24-month personal loan as of August 2021 is 9.39%, according to the Federal Reserve.
It depends on the lender. Some lenders may approve you for a personal loan with a credit score as low as 550. However, your interest rate will likely be very high. In some situations, a lender may issue the loan as long as there is a form of collateral.
The best reasons to get a personal loan have the potential to better your overall financial situation. For example, if you get a loan to consolidate high-interest debt, the loan will likely lower your monthly payment and the amount you pay in interest, assuming the rate is lower than for the debts you’re consolidating. It’s also common to use a personal loan for home improvement. It’s only a good idea to get a personal loan if you know you’ll be able to repay the lender.
The benefits of a personal loan vary widely depending on your situation. When you’re considering a personal loan, it’s essential to weigh the pros and cons to see if it’s the right decision for you. It’s also good to shop around for the best interest rate and terms.
If you’re not careful, personal loans can lead to debt issues and credit problems. However, when used responsibly, a personal loan can be a great way to access funds you need for various purposes. It can also help you build or improve your credit score.
A signature loan is a personal loan that relies only on the borrower’s signature as collateral. Find out if a signature loan is right for you.
Ashley Eneriz
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