Many people find themselves in a financial crunch at one time or another. Whether your car unexpectedly breaks down or you need unforeseen home repairs, you may find yourself needing a loan. Banks offer various types of loans and a signature loan is one of them. A signature loan, as the name implies, uses only your signature as a guarantee that you'll pay back the loan. Collateral is not required. Before deciding whether a signature loan is right for your situation, it's best to know the benefits and drawbacks.
No Collateral Required
Most loans that banks offer require some form of collateral. That is, something of value to guarantee that you won't default on the loan. An example of collateral includes a boat or a car. By putting up collateral, you are promising that you will pay back the loan. If you fail to repay the loan, the bank can seize the property you put up as collateral.
Quick and Convenient
Unlike secured loans, signature loans are typically processed quickly, giving you fast access to the funds you need. Approval can occur in as little as a few minutes. Once you agree to the terms of the loan and sign on the dotted line, you're usually good to go. In some instances, it can take a few hours. Either way, it's excellent if you are in a crunch and need the funds for something such as a car repair.
Higher Monthly Payments
One of the primary drawbacks of a signature loan is higher monthly payments. Because there is no collateral on the line, the lender increases the monthly repayment plan so that your loan is paid off as soon as possible. This is why signature loans are best taken out when you don't require a large sum. This way, you're able to repay the loan in a short amount of time and you avoid having extremely high monthly payments. The larger the loan, the higher your monthly payments.
Higher Interest Rates
Because unsecured loans are riskier to the lender, you can expect to pay higher interest rates on the amount you borrow. This means the amount you repay the bank will be higher than if you had put up collateral. Again, the best way to overcome this drawback is to borrow a manageable amount, as to avoid having to pay back a significant amount in financing fees. To off set the risk, the bank will use your credit score to set the interest rate. The better your score, the lower your monthly financing fees.