Definition
A personal loan, or signature loan is any type of loan that does not require collateral to protect the lender.
Analysis
Personal loans are often called signature loans because they generally only require a borrower’s promise to repay. This personal guarantee is often all a bank, credit union or finance company will require for a borrower that meets eligibility requirements for the loan.
Eligibility requirements will vary by lender. Borrowers must meet creditworthiness standards by having an acceptable credit score. A borrower can generally have no accounts with that financial institution that are currently in bad standing in order to gain approval. Also, they may have to meet certain income requirements.
Personal loans tend to be made in amounts from $1,000 to several thousand dollars. Credit unions and some banks tend to charge lower rates of interest, while finance companies frequently charge interest in excess of 20% APR. Borrowers that do not meet eligibility requirements at banks or credit unions will often seek personal loans at finance companies or other fringe banking outlets.
Since there is no collateral on a personal loan, lenders cannot seize property in order to cure a default. Instead, they must rely on negative credit reporting and on collections to coerce the borrower to repay.
