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

By: Ryan Cockerham | Reviewed by: Alicia Bodine, Certified Ramsey Solutions Master Financial Coach | Updated February 05, 2019

Obtaining a bank loan to finance a significant purchase in your life can be a powerful tool and immensely helpful resource. For many individuals, a variety of loan options will be available when the time comes to borrow money. Whether or not the terms of your loan allow for an easy, hassle-free repayment schedule will likely depend on the specific type of loan you are applying for and the amount of money you need to borrow.

Both signature loans and short-term loans allow individuals to borrow various sums of money in their time of need. Where these loans differ, however, is in the specific amount of time offered to borrowers to repay the principal and the interest rate the loans will carry. Both signature loans and short-term loans also feature noticeably different eligibility requirements.

Tip

Although both signature and short-term loans are unsecured borrowing, signature loans are typically only available to applicants who can demonstrate excellent credit history.

The Basics of Signature Loans

A signature loan is also commonly referred to as an unsecured bank loan. With these loans, banks offer various sums of money to borrowers based solely on the applicant's credit history and current standing with the bank. Given the fact that the bank does not take any form of collateral as a guarantee against payment delinquency, individuals will typically need an excellent credit score in order to be eligible to apply for a signature loan.

Repayment terms can vary significantly from bank to bank. Individuals may have anywhere from a series of months to years to repay the principal balance of their loan. Again, the specifics of their loan will primary be based on their credit history. Simply put, credit history and a current credit score act as a measure of trustworthiness and legitimacy for these loans.

Understanding Short-Term Loans

Unlike signature loans, a short-term loan is typically offered to anyone who can prove that they have some form of stable employment. The most common form of short-term loan in existence today is the payday loan. With payday loans, individuals are allowed to borrower a specific sum of money which they promise to repay when they receive their next paycheck.

Both short-term loans (also commonly discussed as online payday loans) and signature loans are unsecured forms of borrowing. That being said, short-term loans are often offered to individuals with less than perfect credit scores. Because of this, it is not uncommon for interest rates on short-term loans to be significantly higher than those of signature loans. Individuals who are unable to pay back the balance of their short-term loan in keeping with the guidelines established by the lender will often find themselves overwhelmed with a soaring principal balance due to incredibly high interest rates.

With these ideas in mind, it is not uncommon for financial institutions and lenders to warn individuals against relying on short-term loans. Unfortunately, however, those individuals who cannot qualify for superior loan offerings due to poor credit may not have many options available to them.

Other Important Considerations

To answer the question of which loan company is best for bad credit, individuals should likely begin looking amongst various short-term loan venders in operation today. However, it is critical to remember that failure to repay any of these loans could result in significant damage to one's credit as well as potential legal action.

With that in mind, it is strongly recommend that potential borrowers carefully review all of the terms of their loan offerings in order to ensure that they are fully aware of what will be required of them to complete full and prompt repayment. Failure to complete this early research could lead to catastrophic result over the long-term.

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About the Author

Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.

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