Is a Signature Loan a Personal Loan?
Confused about signature loans vs. personal loans? This guide clarifies their relationship and how they function.
Among these, “signature loans” and “personal loans” are frequently used, sometimes making it difficult to understand their specific meanings and relationship. This article aims to clarify the distinctions and connections between these two terms, providing a clear understanding of what each entails.
Understanding Signature Loans
A signature loan represents a type of unsecured loan, meaning it does not require the borrower to pledge any collateral, such as a vehicle or real estate, to secure the debt. Instead, approval for a signature loan relies primarily on the borrower’s creditworthiness and their solemn promise, signified by their signature, to repay the borrowed funds. Lenders assess an applicant’s financial history, income stability, and credit score to determine their eligibility and the terms of the loan.
Understanding Personal Loans
A personal loan is a broad category of installment loans designed for a wide range of personal expenses. These loans provide a lump sum of money that the borrower repays over a set period through fixed monthly payments. Personal loans can be either secured or unsecured. A secured personal loan requires collateral, while an unsecured personal loan does not. Common uses for personal loans include consolidating existing debt, financing home improvements, covering unexpected medical expenses, or funding significant purchases.
The Relationship Between Signature and Personal Loans
A signature loan is a specific type of personal loan. More precisely, it is an unsecured personal loan. While “personal loan” serves as the overarching category, a “signature loan” specifically denotes those personal loans that are granted without the need for collateral. This distinction highlights that all signature loans are indeed personal loans, but not all personal loans are signature loans, as some personal loans can be secured by assets.
Common Features and Application Steps
Both signature loans and other unsecured personal loans share several common features and application requirements. Interest rates on these loans can be fixed, meaning they remain constant throughout the loan term, or variable, fluctuating with market rates. Annual Percentage Rates (APRs) typically range from approximately 6% to 36%, influenced by the borrower’s credit profile. Repayment terms commonly extend from one to seven years, with monthly payments structured to pay off the principal and interest.
Eligibility criteria for these loans generally include a satisfactory credit score, a manageable debt-to-income ratio, and consistent income. Lenders often prefer credit scores above 670 for more favorable terms, and a debt-to-income ratio below 40% is commonly considered beneficial for approval. The application process usually involves submitting proof of identity, such as a driver’s license, and proof of income, like recent pay stubs or tax returns. Applications can be made through various financial institutions, including traditional banks, credit unions, and online lenders, with funds often disbursed within a few business days of approval.