Signature Loans - What's Their Downside?

Another name for personal loans are signature loans. When you take out a signature loan, your signature secures your loan instead of collateral. You are getting financing, without having to run the risk of losing your personal property. Whether or not you get approved for your financing request is going to depend on your credit history as well as several key variables including but not limited to your debt, income, employment history and residence history.

When compared to secured loans, signature loans do have some risks associated with them.

Higher Interest Rates
Even for people with excellent credit, signature loans are considered more risky by lenders since there is no collateral securing the loan. As a result, interest rates are often higher for signature loans than they are for secured. And with higher interest rates, you will end up paying more money for your loan over the life of the loan. You can off-set the interest cost by utilizing a shorter term loan. However, be prepared to pay more every month as a result because the shorter the term, the higher your rate is going to be.

Since signature loans are considered higher risk, their loan terms are not as favorable. Signature loans do not have as advantageous grace periods. With a secured loan you can miss two payments or more before your account hits collections. However, one can expect their signature loan account to be negatively impacted even after they miss one payment.

Your Credit
Your account activity with a signature loan can have a very positive or negative impact on your credit. Not missing any payments and paying timely for the duration of your signature loan will equate to a dramatic increase of your credit rating and score. On the flip side, even missing one payment will have a negative impact. And if you default on your signature loan, your credit will be crushed and you may even be forced into bankruptcy to pay the creditor back. Therefore, don't borrow more than you can afford. Learn more about the consequences of defaulting.

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