Signature Loans - Unsecured Loans, Secured Loans

Signature Loans - Another Alternative to High Interest Credit Cards

Last Updated: May 26, 2010

A signature loan is a loan to which no collateral is pledged. A signature loan simply requires your signature as a guarantee that you will repay the loan. These types of loans are called personal or unsecured loans.

You still have choices in life when it comes to spending money. Signature loans can help you to reach your goals and bring you the finer things in life. In fact, even if you have bad credit, you can still obtain a personal loan to get the things that you want. Signature loans can help you to avoid exorbitant credit card debt and fees, overdrawn checking accounts, and costly interest fees. They can even help you rebuild your credit. The credit scoring model gives favorable heavy weight to timely payments made on a signature loan.

Signature loans can be secured as in a car loan or mortgage, or if you have a good relationship with your bank or credit union, you can get an unsecured signature loan for up to $10,000. Even when I had a bankruptcy, because I had a good relationship with my credit union, I was able to get an unsecured signature loan for $5,000. Typical terms for a signature loan can be three, four, or five years.

The other type of signature loans are ones offered by furniture stores, electronic stores, etc. With these, you can purchase things like:

Home appliances
Furniture

I'd be leery of going through a store where the above wares are sold for financing. The rates and fees are almost always prohibitive. Stores with this kind of financing are not looking out for your best interests. You can get a much better deal at a bank. Avoid credit cards for such purchases. Do the math, even if you don't have a home, you can probably get a good installment loan which beats throwing those purchases on a credit card.

Where Can You Get a Loan?

The first place to shop for signature loan is where you normally bank. If you have a relationship with your bank or credit union, you might find they have exceptional values as far as fees and interest rates. Absolutely do not consider a payday loan - the fees on these types of loans can range up to 450% APR. For more information on payday loans, go here. Signature loans allow consumers to spread the payments out over the course of several years.

Personal installment loans work just like auto loans or mortgages. The borrower makes regular monthly payments, equal in value, to repay the loans. Just like a mortgage, with each additional payment, the principal balance of the loan decreases and the amount of interest due that year decreases as well. The amount of interest paid throughout the course of the year is defined in the APR or annual percentage rate.

Ask questions when applying for your loan! In some cases, automatic payment might reduce the interest rate that you are charged on the balance of the loan. Paying the loan off early or making extra payments is always a good idea and can dramatically decrease the amount of interest overall.

Even if you have a good relationship with your bank or credit union, some restrictions might apply in order to obtain a signature loan such as you might need to have a good credit rating or a credit score above 450. Typically, a minimum amount must be borrowed up to a maximum cap on the borrowed amount.

After You Get the Loan

Most signature loans feature a coupon book for payments that will be mailed in while those that are set up for automatic withdrawal from a checking account do not. In most cases, loans of this type require a monthly payment that remains the same throughout the entire term of the loan. This still requires effort on your part to remember the payment and mail the check. For the ultimate lazy man's way, online banking not only saves you the cost of a stamp, but you can have the money automatically drawn from your account.

In summary, personal signature loans beat credit cards, store financing and payday loans as the means to get that new shiny toy you are desperate to have. You need to make sure, of course, that you can afford it, as the terms are anywhere from 3-5 years.