A personal signature loan is an uncollateralized personal money loan that a bank will give you that is based off of nothing more than your personal credit. The reason it is called a signature loan, is that it is based on not much more than your signature and good faith backed by your credit report.
What are the Differences between Collateralized Loans and an Uncollateralized Loans?
Collateralized Loan- Often called an "unsecured loan". This is money loaned that the bank gives to you, but is backed by something you give them rights to. For example: You need $7000 and in return for the loan the bank demands that you put up your car as collateral. You continue to drive and use the car, but in the event you do not pay the loan, the bank has the right to take your car and sell it. Your car acts as collateral.
Uncollateralized Loan- This means the bank will give you money based off of your ability to pay them back based off of their findings from your credit report. It is a loan that is based on their faith in your ability to pay it back over time.
- The process and decision making for obtaining a personal signature loan is often very fast. Since this is based on your credit report, the ability to judge your credit worthiness is fairly simple for the bank.
- They usually allow for up to 5 year (or 60 month) payment schedules for the life of the loan.
- The money can be used for almost any purpose. If you want to consolidate some other debts under one payment, a personal signature loan can accomplish this. If you want to go on a vacation this is one source for funding such a trip. Want to buy a computer? This is one option you can use other than financing it through the retailer or paying for it all up front. The possibilities are endless.
- Because the loan is unsecured (or not collateralized), the loan interest rate is often very high. The rates might range between 10.95% - 13% on average.
- Due to the basic nature of all loans and interest payments, you will end up paying more than you originally borrowed by the end of the loan.
o Example: a $5000 dollar loan at 12% interest over 5 years would equal total payments of principal and interest equal to $6673.33
- The loan will add another liability to your credit report until paid. This will hinder your ability to get other loans and lines of credit until the loan is paid. Also, because it is unsecured, it may drag down your credit a bit.
Are They Right For Me?
In general, I believe that personal signature loans should be considered luxuries. It is nice to know that they exist and they are another tool to be used if needed, but I do not believe they are something that everyone can handle. Any kind of debt is a big responsibility. A personal signature loan is no different. All one needs to do is turn on the local news and look at the state of the economy they can quickly see that debt carries a heavy burden.
If you are a disciplined person with your finances and have a track record of great credit dealings then maybe it is a useful tool in your financial arsenal. Remember though, personal signature loans carry a hefty interest rate most times. This will translate into more money lost over time.
Personal signature loans are tools and not to be relied on for everyday use. Be confident of your ability to pay and be mindful of your new debt obligation. If you have the discipline and the means then a personal signature loan might be a great tool. Please remember, it is just that; a tool and nothing more.