A signature loan is a kind of personal loan or unsecured loan that is provided by lenders when the loan applicant gives his or her signature as an assurance that they will repay the loan without fail within a specific timeline. This signature of the loan applicant will serve as the sole collateral for the loan application. The borrower does not have to give any other form of security or collateral to procure this loan. The advantage of a signature loan is that one can apply for it for any reason. As a borrower, you will not have to specify the reason for taking a loan to your lender.
A signature loan is sometimes called a character loan or a good faith loan as it is offered solely based on the borrower’s reliability and creditworthiness. The characteristics of signature loans are very similar to that of personal loans. You can get a signature loan from a bank or a non-banking financial corporation (NBFC) only if you prove to them that you will be able to repay the loan.
Some lenders allow even e-signatures or digital signatures or online signatures for signature loan approvals. This is more common in countries like the United States. In India, signature loans are not too commonly available. You might find lenders after doing proper research.
How does a Lender Approve a Signature Loan Application?
When you approach a lender for a signature loan, the lender will check and evaluate your income, your employment status, your credit history, your bankruptcy history, and your credit score provided by CIBIL. If you have a high credit score, an impressive credit history, and a good monthly income, then a lender will accept your signature loan application.
There are some lenders who may ask the borrower to make arrangements for a co-signer. This co-signer will be required to sign a promissory note and nothing else. In case the actual borrower misses any installment deadline or goes on to default the loan payment, then the lender will get in touch with the co-signer, where the co-signer will also be held responsible.
Features of Signature Loans
- You do not have to furnish any collateral or asset while applying for a signature loan. You only need to give your signature while applying for this loan. The signature is used as a promise from you.
- The interest rates for signature loans are typically high as you do not have to submit any collateral. Signature loans are more expensive than secured loans as they are not secured by any collateral. Hence, lenders face more risk with signature loans. Therefore, lenders tend to charge higher interest rates for signature loans.
- One should have high creditworthiness in order to apply for a signature loan.
- You should not have missed any loan installments or declared bankruptcy at least for 2 years before you apply for a signature loan.
- If you are a credit card user, you will need to keep a low due amount in your card so that your chances of getting the signature loan is higher.
- The lender will check your debt-to-income ratio to decide if your signature loan application should be approved or not. With your income, you should be able to pay your existing debts and a new signature loan. If this is proven, then your lender will accept your application.
- Signature loans are very helpful during financial emergencies as the application process is very short. If you meet the required eligibility criteria, your loan application will get approved in a jiffy. Even the documentation process is minimal and simple.
- Signature loans typically follow fixed interest rates, wherein your interest rate will remain fixed throughout your loan tenure. This is very beneficial as your loan expenses will remain the same and you can plan your overall monthly expenses accurately.
- The financing provided by signature loans will differ. Most often, signature loans offer up to 100% financing to take care of your financial requirements.
- The processing fee for signature loans is similar to the processing fee for personal loans. In India, it typically ranges from 2% to 3% of the loan amount.
Eligibility Criteria for Signature Loans
- The age criteria can differ from lender to lender. Typically, the minimum age to apply for a signature loan is 21 years and the maximum age is 55 years. For some lenders, the maximum age requirement is 60 years. You can check with your bank or NBFC before applying for the loan.
- The income criterion can also change from bank to bank. Ideally, your monthly income should be at least Rs.20,000 while applying for a signature loan.
- To get a signature loan, your credit score from CIBIL should be at least 750. Some lenders may also accept scores above 625. Do check with your bank before you apply.
Documents Required for Signature Loans
To apply for a signature loan in India, you should mandatorily submit certain documents for providing proof.
- Proof of address
- Proof of identity and age
- Proof of income
- PAN card
- Latest bank statements
- Latest salary slips
- Passport-sized photographs
Fees and Charges Associated with Signature Loans
When you take a signature loan, you will need to pay certain fees and charges for enjoying the benefits of the loan. The common fees include processing fee, late payment fee, special service request fee, cheque bounce fee, etc.
Uses of Taking Signature Loans
You can apply for a signature loan and use it for numerous purposes and some of them include:
- For wedding expenses
- For your or your child’s higher education expenses
- For debt consolidation
- For home renovation or redecoration
- For vacation expenses
- For paying credit card dues
- For purchasing a two-wheeler, etc.
Consequences of not Paying Signature Loans on Time
Charges: One of the most important terms and conditions of a signature loan is that you have to pay the loan entirely before the payment deadline expires. In case you fail to pay any equated monthly installment (EMI) for your loan or in case you struggle to repay the full loan, you will be asked to pay certain penalty fees or charges. Whether you make a partial payment, a late payment or a non-payment, you will have to pay certain charges that will be quoted by your lender. You can also check your loan policy document before you make the payment to avoid payment of unnecessary fees.
Impact on credit score: Apart from having to pay several charges, even your credit score will get affected negatively when you fail to pay your signature loan on time. Your credit score will be given by credit bureaus. In India, CIBIL prepares a credit report according to your debt habits and credit payment behaviour. This credit report information will give you your credit score. To avoid any negative effects on your credit score, you should make certain that you pay your signature loan installments on time.
You can apply for signature loans offline or online. To apply offline, you can visit the branch of any bank or NBFC and meet a branch representative for assistance. You can submit the required documents in person and complete your loan application. To apply online, you can visit official websites of lenders or third-party lenders. Do compare fees and interest rates associated with each of the loan options. You can make comparisons and then pick the most suitable one.
Since there is no need for submitting a collateral and since the documentation process is so simple, a signature loan is a great idea for multiple financial needs. Moreover, it is provided by a lender if you show yourself as a financially responsible and trustworthy borrower.
A GST rate of 18% will be applicable on banking services and products from 01 July, 2017.