Google terms like ‘cash advance’ and ‘short-term loans’ and it will take mere seconds for the search engine to return millions of results for your perusal. The world of short-term, unsecured loans is so broad in this country that people looking to borrow have more options than they know what to do with. Unfortunately, the wide availability of these sorts of loans has led to plenty of confusion.
For example, people often get confused when they hear others talking about payday loans and signature loans in the same conversation. What’s the deal? Are these two separate loans, or are they actually the same thing?
It would be great for consumers if those who put together information about payday and signature loans would be a bit more clear in their choice of language. But that is another topic for another article. The point of this article is to clear up whatever confusion does exist.
The Signature Loan Explained
The signature loan gets its name from the fact that borrowers typically only need their signatures along with a good credit history and sufficient income to qualify. Lenders rely on borrower signatures as an iron-clad promised to repay. There is no collateral involved like there is when purchasing a home or a new car or when getting a pawn loan
This lack of required collateral makes signature loans unsecured credit instruments. If you know anything about unsecured debt, this should tell you something. It should tell you that the term ‘signature loan‘ is fairly broad. It is more of a blanket term that covers all sorts of loans a person can get with little more than a signature.
This also tells us something about payday loans. Keep in mind that although a typical payday loan may be obtainable by demonstrating decent credit, a steady job, sufficient income to repay the loan on time, and satisfying risk underwriting criteria, you must also give the lender more security than just your signature in support of your promise to repay.
The Payday Loan Explained
The payday loan gets its name from the fact that the earliest forms of these loans were based on the idea of repayment on the day the borrower got paid. Typically, payday loans require a borrower to furnish a postdated check or preauthorization to electronically debit funds from your account.
A payday loan is a short-term loan that is normally repaid in under a month – unless the borrower and lender agree to installment terms. Such loans are intended to provide emergency cash. And because they are short-term instruments, you shouldn’t borrow more than you can repay.
The long and short of it is that payday loans are designed to help you pay for unexpected needs or emergencies, just like signature loans. Both kinds of loans may be obtained (assuming you meet underwriting standards), as long as the borrower has a verifiable income, a decent credit history, but payday loans also require you to provide authorization to ACH or electronically debit funds when due or to furnish a postdated check.
Signature loans Have Evolved
One last note about signature loans: they have evolved quite a bit over the years. As explained by the Investopedia website, signature loans used to be reserved mainly for people with poor credit scores and histories; people who had trouble obtaining credit through more traditional means.
Today’s signature loan borrowers are just as likely to demonstrate great credit histories. They choose signature loans over traditional banking solutions because they are faster, more convenient, and easier to obtain.
Now you know a little bit more about payday and signature loans. Signature loans are unsecured loans and do not require collateral. Payday loans tend to be more short-term require a postdated check on preauthorization to electronically debit funds from your account.