A closed-end signature loan is a type of personal loan that is typically available to people with good credit. Such a loan is set up with fixed payments that cover both the principal amount of the loan and the interest due over the life of the loan. Payments and the payment period remain the same throughout the life of the loan. Various lenders, including banks and credit unions, offer these loans and may charge fees for the service in addition to the interest.
Basics
A closed-end loan is for a fixed amount of money, and once the loan is repaid, the loan is completed. This is different from open-ended loans, such as certain types of home equity loans or credit cards, where you can borrow repeatedly, up to the specified limit, and can borrow more as you repay the principal amount. If you are late paying off the closed-end loan, you will incur additional expenses, such as interest and penalties, but there are no fees for paying off the loan early, and you may be able to save some of the interest costs on the loan if you do.
Purpose
You can get a closed-end signature loan for almost any purpose, such as home repair, remodeling, a wedding or a vacation. It is usually best to save the money in advance, rather than borrowing, since a loan can cost you thousands of dollars in interest and fees. When paying cash isn’t possible, as often happens in an emergency situation, a loan can help you resolve an immediate problem, but give serious consideration to the costs before borrowing money for an optional expense, such as a vacation.
Collateral
The term “signature loan” indicates that this type of loan is based on your signature alone, and no collateral is required, while secured loans may require that you provide collateral such as a home, car or other items of value that can be taken and sold if the loan is not repaid. In a signature loan the lender has no collateral to take in place of payment, but it will report you to the credit bureaus if you pay late or don’t pay at all. The lender may also file a lawsuit if you default on your loan, which can result in a judgment that allows the lender to attach your bank accounts or garnish your paycheck.
Considerations
If you have bad credit, you may not be able to get an unsecured, or signature, loan. If you do get one, chances are you will have to accept a higher-than-normal interest rate. Typically a lender will flatly refuse to give you a signature loan but may counter with the offer of a secured loan. The length of the loan will affect how much you end up paying overall. For example, if you borrow $10,000 at 15 percent interest for four years, you will need to make payments of almost $280 per month and will end up paying back a little over $13,300. However, if you need smaller payments, you can borrow the same amount for five years and pay less than $240 per month, but you will end up paying more than $14,200 total to cover the interest the lender will charge for the extra year.