What Makes Signature Loans Different from Personal Loans

Personal finance has many tools to deal with unexpected expenses or jumpstart long-term goals. When a considerable cost arises, personal loans often come to mind. However, within the personal loan category, there are two main options: signature loans and personal loans. While the names sound similar there is a critical difference that can make a significant impact on your borrowing experience.

We’ll explore how signature loans differ from personal loans and when a signature loan might be the best financial move for you.

What You Need to Know About Signature Loans

Signature loans give quick and easy access to cash. Your signature acts as your pledge to repay. Signature loans range from $1,000 to $50,000, with repayment periods lasting from 24 to 60 months. Interest rates deviate based on your credit but you can find competitive offers with APRs as low as 4.99%.

Signature loans are readily available from traditional banks and credit unions, but online lenders can also be a good option. Online signature loans cater to borrowers with varying credit profiles with a convenient application process. No matter the lender, be aware of origination fees, which are usually 1% to 8% of the loan amount.

How Do Signature Loans Work?

During application, lenders may assess your income, credit score, and debt-to-income ratio to decide your eligibility and interest rate. Once approved, you’ll receive the loan amount in a lump sum and can use it for various purposes. Repayment involves fixed monthly installments over a set term. While some lenders allow prepayment, it may come with additional fees.

Signature Loans vs. Personal Loans: What’s the Difference?

• Secured vs. Unsecured

Signature loans are unsecured; you don’t need to put up an asset like a car or house to qualify. Personal loans can be secured or unsecured. If you secure a personal loan with collateral, you get a lower interest rate.

• Credit Score Considerations

Generally, signature loans are best fitted for borrowers with good to excellent credit (typically above 670). It enables you to secure lower interest rates and more favorable loan terms. Personal loans may have a slightly lower credit score threshold (around 610-640), especially if they can offer collateral for a secured loan.

• Installment vs. Revolving Credit

Both signature loans and personal loans are installment loans. It means you repay the loan in regular monthly payments over a defined term. It makes budgeting easier. However, credit cards, another form of personal loan, offer revolving credit with more flexibility but often come with even higher interest rates.

Signature Loans: When They Make Sense

• Conquering High-Interest Debt

By consolidating multiple credit cards or lines of credit into a single loan, you can reduce your overall interest rate and streamline your repayment process. Just be sure the signature loan’s interest rate is genuinely lower and offers a fixed rate for predictable monthly payments.

• Home Improvement

Unexpected home repairs or value-adding renovations can be costly. While a home equity loan (HEL) might be ideal, obtaining one can be challenging. A signature loan can step in, but be sure the total loan cost is less than the expected increase in home value after the project.

• Medical Bills

Online signature loans are a viable option for unexpected medical bills that you can’t cover out-of-pocket. Online lenders allow prequalification to check rates and terms without affecting your credit score.

Consider better alternatives before turning to a signature loan for the following scenarios:

• If you have a car, home, or other valuable asset with equity, a secured loan might be a better option.
• For significant purchases like homes or vehicles, explore mortgages or auto loans.
• Poor credit can make signature loans challenging to obtain or come with unfavorable terms.
• While most loans have them, excessively high origination fees or prepayment penalties are red flags.

Conclusion

Signature loans provide quick, flexible funds with fixed monthly payments, unlike credit cards with growing balances. This structure helps you manage debt and reach financial goals. Carefully consider your circumstances and explore all options before applying. Signature loans can help conquer debt, manage unexpected expenses, or invest in your home’s value. The key lies in understanding when a signature loan shines and when an alternative financial path might be a better fit.