Another name for a signature loan is a personal loan. It only requires the borrower’s signature which the financial institution use as collateral. The interest charged is relatively high as the financial institution relies on the applicants signature as a promise that the loan will be paid. The financial institution lending the loan does a background check on the credit history of the borrower before approving the loan request. The lender approves loans for those with great credit history and a stable source of income. The borrower can use the signature loan for several purposes such as medical expenses, vacations, etc. The process of applying is easy as it only demands the borrower fills a form and end to the lender. Below is a highlight of some of the pros of taking a signature loan.
The loan is unsecured and only requires the applicant to append his or her signature. Personal loans will not ask for collateral such as land or a house. This benefits the lower income earners who have no fixed assets to attach to their loan application.
It also beneficial in times of emergency cases, when one needs money urgently and has no time to wait for the normal processing of other types of loans. Since the applicant is not required to produce documents, the processing time becomes faster. Since the loan only requires identification documents and application form, the verification process becomes fast. The disbursement process also takes less time as compared to other sources of loans.
The applicant is not required to state the purpose of the loan when applying. With other types of loans, the applicant is required to indicate the purpose of the loan and use the same money for the intended purpose. Loans such as car loans require the applicant to purchase a vehicle and proof that the money was not diverted to other purposes.
Personal loans allows the borrower to redirect it to other matters that requires money urgently. The personal loan provides a lower risk to the borrower, since he or she will not be required to produce any asset. Borrowers who default signature loans have a lower risk of losing any assets the lender can do little to recover the loan. The borrower can only be declared bankrupt in case the lender sues the borrower for defaulting to pay the loan as there was no asset attached to the signature loan during lending.
Below is a discussion of some of the disadvantages of personal loans.
Signature loans attracts high interest rates. This is triggered by the fact that the loan has no collateral. Signature loans do not allow the borrower to pay the loan in parts. It attracts a shorter repayment period as compared to other types of loans. Shorter repayments periods attracts higher monthly deduction as compared to other loans like housing which have a longer repayment period. The high installments amounts forces many borrowers to default their loans.