Signature loans are basically unsecured loans where banks or other financial companies give loans to people without taking any collateral. The banks that give such loans to people only look for a strong credit history and a secure source of income of the person. The loan in such cases can be for anything, but the catch is that the interest rates in such kind of loans are usually very high. The borrower needs to find a cosigner for signing a promissory note in order to get a signature loan. The bank does not disturb the cosigner until and unless the borrower fails to repay the loan.
Scenarios where Signature loans make sense
Signature loans are also called goodwill loans, unsecured debts or character loans. Signature loans should only be taken in cases of emergency when the person has a secure source of income because failure to repay this debt can have really bad consequences. Signature loans are normally used in case of bankruptcy or liquidation of assets or business.
In case of bankruptcy, the bank will have general claim to the assets of the borrower because there are high risks of the borrower not being able to pay off the signature loan. In other cases the interest rates are really high – generally in the range of 20%-25%. Depending on the bank, the rates can be higher or lower. Due to the high stakes in case of signature loans no credit checked, these kinds of loans are offered by very few banks and many loan sharks who do not fear the law. But borrowers who use the help of signature loans for small purchases like computers, TVs, etc. have to face comparatively less intrusive consequences.
Types of signature loans- payday loans and cash advances.
A payday loan is also called a payday advance loan. Payday loan is the kind of loan provided by either a bank or a financial company or a loan shark after looking at the borrower’s payroll and credit history. Legislation including payday loans is different in different countries. In this case, the bank or lender provides a short term personal loan to the borrower and the borrower is expected to return the money after his next payday.
So banks allow their clients to withdraw money below a predefined limit. This withdrawal can be made from the country or out of the country from an ATM. The borrower has to pay back the money when the bank sends a bill and the borrower has to pay back the money with high interest rates. All or some percentage of the loaned money is called the credit limit (depending on the lender and the borrower’s agreements).
Secured loans normally have collaterals and lower rates of interest, but unlike signature loans, secured loans are usually not issued in case of emergencies.
NOTE: A government issued id proof or income proof and bank statements are to be shown compulsorily in order to get a signature loan. Some banks appreciate a collateral to the loan.