Comparing the Advantages and Disadvantages of Signature Loans

A signature loan does not actually require collateral. Instead, the signature of the borrower is considered collateral enough on the loan. Your signature, then, is your single assurance you will not default. This is a complicated option because the benefits of this type of loan do not always compensate for the added expense.

No Need for Collateral

Individuals who do not have any assets have a difficult time getting loans. Most loans require at least a moderate amount of collateral before a bank will consider funding them. Home loans and car loans are both forms of secured loans using collateral in order to back and guarantee payment. If you do not own any equity in this type of asset, you may not have the choice to gain funding when it is needed. Many people are critical of this problem, saying banks fail to address the financing needs of those who have low ownership in actual assets. Soldiers, students and young people are the primary victims of this problem. Through signature loans, you can gain liquidity despite lack of equity.

Lower Risk for Borrower

There are many borrowers who simply do not feel comfortable placing personal assets as collateral. You may be the type of person who does not want to risk your home for an equity line of credit. If you default on a signature loan, there is little the lender can do to collect the funds. You may be sued for the money, but even then you have no actual asset on the line. If you do not have the cash, a court will not order you to surrender an asset since you never promised to do so. This is particularly important in a bankruptcy situation. The court will dismiss this type of debt while ordering liquidation of assets used as collateral for any other loans.

Higher Financing Fees

In exchange for low risk to the borrower, the lender is going to charge higher fees. This allows a lender to earn a great profit on the loan. It also assures the lender will have the principal sum repaid much faster. You, as the borrower, will have to agree to these fees as part of the terms of the loan. Other terms may include an inability to refinance the loan in the future without incurring high penalties. You may find there are very high fees if you are late on a payment as well.

Higher Monthly Payments

In an additional attempt to protect against risk, the lender will want the loan paid off as soon as possible. You will find it is rare to get a signature loan that is longer than 5 years. In fact, most signature loans mature within one year. Short loans are not problematic on their own, but the high monthly payments required on short loans do make them a challenge to fulfill for most borrowers. You will have to come up with the cash in full for the principal plus a very high interest rate in a very short amount of time. Short term loans have higher rates of default for this reason.

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