Understanding Signature Loans

Sign on the dotted line - signature loans offer access to cash.

Most loans consumers obtain from a bank are backed by collateral that the lending institution can then claim if the loan stops being paid. For example, a home loan is secured by the home itself, and if the homeowner defaults the bank can foreclose on and take possession of the house. Similarly, a vehicle loan is secured by the vehicle itself, and if the owner defaults on the loan, the vehicle is repossessed.

There is another type of loan, though, that relies on only the borrower’s signature and promise to repay. Such loans go by several names, including signature loans, personal loans, good faith loans, character loans and personal signature loans.

According to Investopedia, signature loans are granted in part based on the borrower having a good credit history, enough income to support repayment of the loan, and in some cases require a co-signer. Given that there is no collateral to secure the loan, signature loans may carry higher interest rates than other, secured loans.

The funds borrowed can be used for whatever the borrower wants, including, for example:

• Significant purchases, such as jewelry, a car or recreational vehicle
  
• Vacation
  
• Home improvements
  
• School expenses
  
• Medical costs
  
• Debt consolidation, which may make financial sense if the signature loan interest rate is lower than the rates of other debt, such as credit cards

Signature loans are term loans, meaning that the amount borrowed is set, unlike a line of credit that can be drawn upon at need, and once the borrowed funds are repaid over the term of the loan, the account is closed.

If you’d like to learn more about signature loans, contact an On Tap Credit Union advisor at any branch, or you can apply online.