Nowadays, there are so many different loan products on offer that you may struggle to choose. From unsecured loans that don't require collateral to secured loans, bad credit loans, personal loans, and everything in between, you're bound to find a loan product that's right for you.
One option you may or may not have considered is a signature loan-but what is it, and how does it work?
What Is a Signature Loan?
A signature loan is an unsecured loan, which means you can borrow money without having to put up collateral. The idea behind a signature loan is that your income details, credit history, and signature should be enough to qualify for a loan. In fact, the signature acts as a legal promise to repay the loan in place of collateral.
This makes it an attractive option for those needing access to fast cash without going through long-winded loan approval processes.
Signature Loan vs. Personal Loan
Signature loans work the same way as personal loans because you can use them for various needs. You could use them to fund a vacation or your dream wedding, consolidate debt, cover unexpected medical expenses, or even finance home improvements.
So how are they different?
What sets apart a signature loan is that it's unsecured, and the only real collateral is the borrower's signature. While personal loans can also be unsecured, there are secured loan options that require an asset to be used as collateral, for example, a car.
Personal loans are essentially an umbrella term that includes loan types such as signature loans, debt consolidation loans, auto loans, and both secured and unsecured loans.
How Does a Signature Loan Work?
A signature loan works similarly to most types of personal loans. Once approved, you receive the total loan amount, which is yours to spend how you wish.
Typically, you must make monthly repayments that include a portion of the loan plus interest.
The entire loan amount plus interest is split into equal monthly installments leading up to the end of the agreed loan term. Signature loans typically last a few years, depending on the lender and your circumstances.
When you apply, the lender must consider your income and credit history to ensure you can afford repayments. These details also help determine your interest rate and loan offer.
Signature Loan Requirements
The main two signature loan requirements that a lender looks at are your credit history and income-both of which help the lender determine the likelihood of you making full repayments on time.
Credit Score
You will usually need good-to-excellent credit to get approved for a signature loan.
Signature loans typically require a credit score of at least 660, but this depends on the lender. Some accept lower ones, like 580, while others require 700+ scores.
As signature loans come with an increased risk of the borrower defaulting, some lenders will try to cover their risk by only approving those with a strong history of making repayments. Without using an asset as collateral, lenders can't recoup their losses if you stop making payments.
A signature loan may not be out of the question if you don't have the highest credit score. However, because signature loans typically come with higher interest rates for low-credit borrowers, you may be better off looking at different loan types.
Income
Rather than a set income requirement, most personal loan applications are assessed on affordability. Lenders will consider a borrower's current income and typical monthly expenses (including rent, bills, and other financial commitments) to see if they can comfortably afford the monthly repayments.
Another measure of affordability that lenders look at is your debt-to-income ratio (DTI). This is the amount of debt you hold compared to the amount of income you have to play with. A high DTI, typically 43% and above, means the borrower is at greater risk of default.
When Should I Use a Signature Loan?
Signature loans work best for those with good-to-excellent credit scores, as you can get the benefits of a signature loan without the downsides of high-interest rates.
If you're looking for an unsecured loan that you can use for several different things, a signature loan is a great option.
Alternatives to Signature Loans
Signature loans may not be an option for everyone, so if you're looking for alternatives, here are some popular choices:
- Bad credit loans: If your credit score is low, a signature loan may not be your best option. Lenders may not approve your application or may only offer high interest rates. A bad credit loan is another type of personal loan that makes it easier for those with poor credit to get the finance they need. However, interest rates are typically high, and you may only be able to borrow a small amount.
- Home equity loan or HELOC: A home equity loan or home equity line of credit may be a better option if you plan to make home improvements. It works as a secure loan that you borrow against the value of your home. However, this option will depend on how much equity you have in your home and whether you're comfortable using your home as collateral.
- Secured loans: For those who want more favorable loan terms and don't mind offering an asset as collateral, a secured loan could be a good option. Collateral reduces the risk for the lender, so they can give you better interest rates or even a larger loan amount. The downside is that if you fall behind on payments, your asset is at risk of being seized.
- Cash advances: A cash advance is a short-term loan you can access quickly. Credit card companies often issue cash advances, and you may even be able to withdraw the money from an ATM. However, cash advances often come with high interest rates and additional fees.
- Installment loans: This is a broad term for loans you repay in regular monthly installments, which consist of payment towards the balance of the loan and interest on top. This loan type usually features flexible terms and lower interest rates.
Apply for an Installment Loan
To start your loan application, you can apply to Jora Credit directly or learn more about how our loan options work.
At Jora Credit we consider more than just your credit score. See if you qualify today by submitting an application here.