Why Is A Signature Loan Called A 'Good Faith' Loan?
Signature loans may be an unfamiliar financial product for many people. Although many lenders offer this style of personal loan, the name can be somewhat confusing. You may also hear these loans referred to as 'good faith loans,' which, unfortunately, doesn't offer much to clarify how these loans work or why you should consider taking one.
Fortunately, a signature loan is one of the simplest lending options available, and it can be highly beneficial for many borrowers. If you need a loan to cover a personal expense, understanding how signature loans work can help you decide if this product may be right for your particular situation.
What Are Signature Loans?
Personal loans fall broadly into two categories: secured and unsecured. A secured loan requires collateral backing, usually a valuable asset such as your home, car, equities, etc. The purpose of this collateral is to ensure the bank you can make good on your debt, often allowing them to offer you a lower rate since you're taking on a greater portion of the risk.
On the other hand, unsecured loans don't require collateral. Signature loans are a form of unsecured loan. When you take out a signature loan, the bank will cut you a check without requiring you to add any additional collateral. In other words, these loans work similarly to student loans or even unsecured credit cards.
Note that the qualification process for a signature loan can be more difficult than the qualification process for a secured loan. Since you aren't offering any collateral, your lender will need to dig into your income and credit history to ensure you can repay the loan. Once you qualify, you sign on the dotted line (hence the name) and receive your loan.
What's a 'Good Faith' Loan?
Since signature loans don't require any collateral, lenders sometimes informally refer to them as 'good faith' loans. The lender extends you a loan in good faith based on your personal financial history. As a result, your credit score, current debt load, income, and other personal factors will significantly impact the loan your lender will offer.
When Should You Consider a Signature Loan?
Signature loans are unsecured personal loans, meaning lenders will not limit how you can use the money. These loans are a good option for any personal expense, assuming you can afford the loan payments and your credit history allows you to qualify for a sufficiently large loan. If you have an uneven credit history, you may need to work on improving it before you can qualify for a signature loan.
However, for well-qualified borrowers, signature loans offer a high degree of flexibility for urgent personal expenses. If you have an expense that isn't well suited for specialized lending products (such as mortgages or car loans), a 'good faith' loan can be a great option.
Keep these tips in mind when looking for signature loan services near you.