Signature Loans are credit facilities for which no security is required to be created by the Borrower in favour of the Lender. These loans are also known as Unsecured Loans. The term gained currency because such loans are made on the strength of the signature of the Borrower.
Kinds of Signature Loans
IOUs (I owe you), personal loans, and credit card outstanding are all kinds of signature loans. All other terms such as interest rate, payback period, penal provisions in case of default, etc. are spelt out as in the case of any loan.
Sanction of Signature Loans
The major criterion for sanction of such a loan is your credit track record that is measured in your credit score. Your current indebtedness and income flows may also be considered by the Lender.
The rate of interest payable for such loans is usually higher. This is because of the higher risk of default. But the contracted rate of interest would also take into account your credit score and credit history of meeting debt servicing obligations on schedule.
If there is default in paying dues, the Lender has no security to which he can take recourse. But your credit score will be impaired, you may face pressure from collection agents and be sued for recovery of the amount due.
Recommended Read :
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- Facts to Know Before Applying for Personal Loan
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- What is Unsecured Personal Loan?
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- Beware of Personal Loan Frauds