How Does a Signature Loan Work?

What Is a Signature Loan?

A signature loan is an unsecured personal loan of money to be used for whatever purpose the borrower requires. "Unsecured" means that the borrower does not provide any collateral to prove to the bank that full repayment will be made according to the terms of the loan contract. The financial institution loans the money based solely on the borrower's signature. Banks typically offer signature loans of between $500 and $25,000, depending on the borrower's credit rating and ability to repay.

Interest rates offered to borrowers on unsecured loans can vary significantly. Banks may offer prime rates without fees to those borrowers they consider a low credit risk. However, borrowers who are considered high credit risks may have to pay interest rates that are at least triple the prime rate, with fees attached.

Application Process

An individual may request a signature loan by applying at a financial institution in person, over the telephone or via the Internet. A loan application requires disclosure of significant personal and financial information about the borrower. Your full name, date of birth, address and Social Security number are necessary to begin the application process. Information is required about your employment or source of income, including the length of employment and your monthly earnings, as well as proof of income. Proof of income may include paycheck stubs, W-2s, copies of income-tax returns or other legal documents that verify income. Your current monthly bills will be compared to your monthly income to determine your ability to repay the signature loan. A loan approval may be granted almost instantly, or you may need to wait for the loan committee to meet to render a decision.

Payment

Once your signature loan is approved, the financial institution will issue a check to you, or to whomever you need the check made out to. Your first payment is usually due the month following your loan approval. Typical time frames for repaying signature loans are from 12 to 48 months. Your financial institution may send you monthly statements or a coupon book to use to make payments. Another option is to have the payment automatically taken out each month from your savings or checking account. Once the loan is paid in full, you should receive a copy of the original loan contract, stamped "paid in full" and with an authorized signature. Defaulting on a signature loan will not result in the loss of any of your possessions; however, the bank will send the loan to collections. Defaulting will lower your credit score and reduce your chance of being approved for future loans.

Resources

• Bank Rates
• What Are Personal Loans?