What Is the Difference Between a Signature Loan and a Short-term Loan?

It's normal to obtain a loan to buy a house or vehicle. When you take out a loan for a house or car, the lender lets you repay the loan over several years. But what if you need a quick, short loan? In this case, you can apply for either a signature loan or a short-term loan. Signature loans and short-term loans carry certain similar characteristics; neither type of loan requires collateral and they both feature short repayment terms. However, there are key differences between the two.

Obtaining a Loan

Financial institutions, such as banks and credit unions, issue signature loans. You can apply for a loan in-person or submit an application via your bank's online website. If approved for a signature loan, visit the bank to sign your documents and obtain your funds. Short-term loans, also known as payday loans or cash advances, aren't issued by banks and credit unions. These loans are available from private loan companies. You can apply for a short-term loan with a local company or submit an online application. Loan companies operate differently from banks. If you submit an online application for a short-term loan, the loan company conducts the entire transaction via the Internet and fax. You supply your information, such as copies of your most recent paycheck stub, bank statement and driver's license. After verifying your information and receiving your electronic signature, the loan company deposits funds into your bank account.

Credit Check

If applying for a signature loan, expect the bank or credit union to run your credit report and order your credit score. Signature loans do not require collateral. For this reason, these types of loans are harder to obtain. You need an excellent credit score and credit history. The lender may require a credit score of 750 or higher, and if you have any late payments or other negative information on your credit report, this can affect your approval. Credit isn't a factor when applying for a short-term loan. In fact, you can get one of these loans with no credit history and bad credit. Loan companies focus on your ability to repay the loan. Thus, they're more concerned with your employment status and income. If you've been employed for at least three months and meet the minimum income requirement, you're likely to get approved.

Repayment Terms

Short-term loans and signature loans feature short repayment terms. However, if you're applying for a short-term loan, funds are typically due by your next paycheck or within two weeks. Some payday and cash advance loan companies offer 30-day short-term loans. Signature loans are also due within a short amount of time. Banks and credit unions give the option of repaying signature loans within 30 days. If this isn't doable, you can request a longer repayment term, perhaps 60 days or 90 days. There's the option of paying the full balance on a specific date or spreading payments over two or three months.

Do You Need a Cosigner?

You don't need a cosigner when applying for a short-term loan. The loan company takes your personal information, your bank account number and your employment information. In most cases, cash advance and payday loan companies automatically draft the loan balance from your account on the due date. Even though a signature loan doesn't require collateral, some banks and credit unions require a cosigner. Adding a cosigner to the loan agreement protects your bank's interest. If you disappear and never submit a payment, the bank goes after your cosigner for repayment. This person is only responsible for the debt if you default.

About the Author

Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.

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