Closed End Signature Loans: A Complete Guide

Closed end signature loans also known as good faith loans or character loans are a popular type of installment loan offered by banks, credit unions, and other lenders. In this comprehensive guide, we’ll explain what closed end signature loans are, how they work, their pros and cons, eligibility requirements, interest rates, alternatives, and more.

What is a Closed End Signature Loan?

A closed end signature loan is a fixed-term, installment loan that is repaid in equal monthly payments over a set period of time. It is an unsecured loan, meaning it is not backed by any collateral. Instead, the borrower’s signature and promise to repay serves as the guarantee that the loan will be repaid.

Unlike revolving credit like credit cards, closed end signature loans have a fixed payoff date when the entire loan amount plus interest must be repaid in full. Closed end signature loans cannot be drawn on or reused once repaid. The term or length of the loan is set at origination and cannot be extended. Common terms are 12, 24, 36, 48, or 60 months.

These unsecured personal loans can be used for almost any purpose like debt consolidation home repairs medical expenses, vacations, weddings, or other major costs. They provide access to lump sums of cash that would be difficult to save up for otherwise.

How Do Closed End Signature Loans Work?

When you apply for a closed end signature loan, the lender will evaluate your creditworthiness to determine if you qualify They will review factors like your income, employment history, credit score, and debt-to-income ratio

If approved, you’ll receive the lump sum of the loan deposited directly into your bank account. Then you’ll make fixed monthly payments over the set repayment term until the loan is fully paid off. Monthly payments on closed end signature loans stay the same over the life of the loan, unlike credit cards where the minimum payment may fluctuate.

Interest rates on closed end signature loans tend to be higher than rates for secured loans like mortgages or auto loans. However, they are generally lower than credit card interest rates. The interest rate you receive will depend on your credit score and other qualifications.

Pros of Closed End Signature Loans

• Fast funding: Closed end signature loans can provide you with a lump sum of cash deposited quickly into your account, sometimes as fast as the next business day. This makes them useful for unexpected expenses that need immediate funding.

• Fixed payments: Your monthly payment stays the same over the full loan term, making budgeting easier.

• Fixed payoff date: You know exactly when the loan will be fully paid off if you stick to the repayment schedule.

• May improve credit: If you make consistent and timely payments, closed end signature loans can help build your credit history.

• Lower interest than credit cards: Interest rates are generally lower than credit card rates.

Cons of Closed End Signature Loans

• Higher rates than secured loans: Rates are higher than mortgages, auto loans and other secured debt.

• Prepayment penalties: Some lenders charge fees if you pay off the loan early.

• Fees: Lenders may charge origination fees or late fees.

• Can encourage overspending: The lump sum may tempt some borrowers to overspend.

• Missed payments hurt credit: If you miss payments, your credit score can be damaged.

Closed End Signature Loan Requirements

Since closed end signature loans are unsecured, qualification requirements tend to be stricter than secured loan requirements. Here are some common eligibility standards:

• Credit score: Most lenders require credit scores of at least 660-670, though some may approve borrowers with scores in the low 600s.

• Income: Lenders want to see you have enough steady income to repay the loan. Minimum income levels vary by lender but may be $1,500 – $2,000 per month.

• Employment: Stable, verifiable employment is usually required. Self-employment or contract work may be acceptable with proper documentation.

• Debt-to-income ratio: Your total monthly debt payments, including the new loan payment, usually cannot exceed 40-50% of your gross monthly income.

Closed End Signature Loan Interest Rates

Interest rates on closed end signature loans typically range from around 6% to 36%. However, your specific rate will depend on factors like your credit score, income, and loan amount requested. Borrowers with good credit can qualify for rates on the lower end of that range, while borrowers with poor credit will pay higher rates.

The average interest rate on closed end signature loans is around 9% to 12% for borrowers with good credit. This is higher than rates for secured loans like mortgages and auto loans which average 3-6%. However, it is generally lower than the average 15-20% interest on credit card balances.

Be sure to shop around and compare offers from multiple lenders to find the best rate possible for your situation. Online lenders tend to offer more competitive rates than traditional banks.

Closed End Signature Loan Amounts

Closed end signature loans are available in amounts from $1,000 up to $100,000 in some cases. However, most lenders will cap loan amounts at $35,000 or less for borrowers with fair to good credit. Borrowers with excellent credit scores may qualify for higher loan amounts.

Aim to only borrow what you reasonably need for your intended purpose. Taking on too large of a loan can overextend your finances and set you up for repayment troubles down the road.

Closed End Signature Loan Terms

Closed end signature loan terms are usually between 12 months (1 year) and 60 months (5 years). Shorter terms of 12-36 months are more common. Longer terms of 5 years may be available with some lenders, especially for larger loan amounts, but this also means you’ll pay more interest over the life of the loan.

When selecting your repayment term, choose the shortest term you can comfortably afford each month. Opting for a shorter term will save you money on interest and allow you to pay off the debt faster.

Alternatives to Closed End Signature Loans

If you need access to cash but a closed end signature loan isn’t the best fit, here are a few alternatives to consider:

• 401(k) loan: Borrow from your workplace retirement plan if available.

• Home equity loan/line of credit: Leverage home equity if you’re a homeowner.

• Credit cards: Higher rates but may already have access.

• Payday alternative loans: Offered by some credit unions at lower rates.

• Auto title loans: Use your paid-off car as collateral.

• Borrowing from family/friends: Interest-free but can impact relationships.

The Bottom Line

Closed end signature loans can provide a nice middle ground between high-interest credit cards and secured loans like mortgages if you need a lump sum of cash. Just be sure to only borrow what you need, shop for the best rates, and make payments on time. With proper planning and discipline, closed end signature loans can be an affordable borrowing option for large purchases and expenses.