A signature loan, quite literally, is an unsecured loan offered by financial institutions when borrowers offer their signature as a promise to repay a debt. The signature of the applicant reflects a promise to settle the loan within a specific timeline. It is the sole form of collateral used to procure the loan. Hence, signature loans are widely known as ‘character loan’ or a ‘good faith loan’. Just as with a personal loan, funds obtained through a signature loan can be used for any purpose. Thus, a signature loan is a great offering that can be availed to serve any kind of financial requirement.
A signature loan is only sanctioned when a borrower can prove that he or she will be able to repay the loan in time. Leading financial lenders like banks and NBFCs evaluate a borrower’s reliability and creditworthiness before granting the loan. Read on to know more about signature loans and its aspects.
The borrower’s signature is the sole collateral needed to receive this loan.
Signature loans, like personal loans, are unsecured.
The interest rate applied on signature loans is relatively higher as it is collateral-free.
A borrower must have a minimum income and good credit history to get a signature loan.
A lender must ensure a solid credit history on part of the borrower before granting a signature loan. This is because the loan is not secured by any kind of collateral. The lending institute is completely driven by the borrower’s creditworthiness and trust that the repayment will be made within the stipulated time frame. Due to the unsecured nature of signature loans, the interest rate levied is relatively much higher.
Signature loans can be used to fulfil different expenditures, including:
Home renovation or redecoration
Foreign trip expenses
Clearing credit dues
Medical or health costs
Emergency expenses and more
A borrower must fulfil the stated criteria to be eligible for a signature loan:
21 to 60 years
When applying for a signature loan, you must furnish the following mandatory documents:
Proof of address: House Tax Slip, Electricity Bill, Gas Connection Bill, etc.
Proof of identity: Aadhaar card, PAN card, driving license, etc.
Proof of income: Latest salary/pay slips, latest bank statements, employment letter, etc.
2 passport-sized photographs
The approval process for a signature loan is typically expedited. When the bank receives the loan application, it evaluates the borrower’s employment status, credit history, monthly income, past debt default (if any), and more. If the stated checks are promising, the lender will approve the signature loan application.
Suppose the applicant’s profile is not as satisfactory, the lender will request a loan co-signer. The co-signer must offer his/her signature as an assurance for repayment. In case the actual borrower defaults on the loan, the lender will hold the co-signer responsible for the repayment of the loan.
A signature loan comes with certain fees and charges, as with most other types of loans. Typically, lenders levy the following kinds of fees on secured loans:
Special Service Request fee
Cheque Bounce penalty
Late payment charges/fee
There may be other associated costs that are subjective to the lender you choose.
As with every kind of loan default, not abiding by the promise made on a signature loan has grave consequences too. They are:
If you are not able to pay the EMIs on time or make the full loan repayment within the agreed-upon timeline, then you will have to pay a heavy penalty fee. The default charges are quoted by the lender. The loan policy document typically carries the break-up of payable default costs.
Apart from the fact that you must pay heavy penalty charges upon default, your credit score too gets affected when you fail to repay your signature loan. The credit report takes into consideration all your repayment history and the penalty for default is significant. A low credit score hampers your future financial aspirations. Thus, ensure that you make the signature loan repayments on time.
A signature loan does not have end-use restrictions, which makes it the perfect financial solution, especially during emergencies. The non-collateral requirement and simple documentation process further make the unsecured loan ideal. However, you must prove yourself to be a responsible and creditworthy borrower to secure this loan. Ensure that you evaluate your credit history and maintain a good record before applying for a signature loan. Avail a free credit history report from Finserv MARKETS and ensure that you maintain the best financial health. For access to other kinds of personal loans, business loans, home loans, check out Finserv MARKETS’ today.