Legal Definitions - signature loan

A signature loan, also commonly known as a personal loan or unsecured loan, is a type of loan where the borrower does not pledge any specific asset as collateral. Instead, the lender approves the loan primarily based on the borrower's creditworthiness, income, and their promise to repay, which is formalized by their signature on the loan agreement. The lender relies on the borrower's financial history and ability to meet their obligations rather than having a tangible asset to seize if the borrower defaults.

Here are some examples illustrating a signature loan:

• Example 1: Home Improvement Project
  Maria wants to update her kitchen but doesn't want to use her home as collateral for a loan. She has a stable job, a strong credit score, and a history of responsible borrowing. She applies for a $15,000 signature loan from her bank. The bank reviews her credit report, income, and debt-to-income ratio. Based on her excellent financial standing, they approve the loan without requiring her to put up her house or any other asset. Maria simply signs the loan agreement, promising to repay the funds according to the agreed-upon terms.

  This illustrates a signature loan because Maria secured the funds solely based on her creditworthiness and her commitment to repay, without pledging any collateral.

• Example 2: Consolidating High-Interest Debt
  David has accumulated several credit card balances with high interest rates. He decides to consolidate these debts into a single, lower-interest payment to simplify his finances and save money. He applies for a signature loan from an online lender. The lender assesses his credit score, employment history, and current income. Satisfied with his ability to manage the new payment, they offer him a $10,000 signature loan. David accepts the terms, signs the agreement, and uses the funds to pay off his credit cards, now owing only the single loan payment.

  This demonstrates a signature loan because David received the funds to manage his debt without providing any collateral; the loan was granted based on his financial reliability and promise to repay.

• Example 3: Unexpected Medical Expenses
  Sarah faces an unexpected medical bill that her insurance doesn't fully cover. She needs $5,000 quickly but doesn't have the savings readily available. She approaches a credit union where she has been a long-standing member with a good financial record. The credit union reviews her account history, current income, and credit score. Recognizing her strong financial standing, they approve a signature loan for the required amount. Sarah signs the necessary paperwork, agreeing to the repayment schedule, and receives the funds to cover her medical costs.

  This is an example of a signature loan because Sarah obtained the necessary funds based on her established credit and trustworthiness, without needing to offer any assets as security for the loan.