Building good credit means you should have plenty of options to obtain money to start a business, consolidate credit balances or fund a nice vacation. You can obtain a credit line or signature loan, both of which are types of unsecured loans. The best option depends on your financial needs and circumstances. Secured loans require collateral that can be seized if you default.
An unsecured loan is similar to a credit card in that you don't have to provide any collateral, something your lender can sell to pay off your loan if you don't. The lender grants you the loan solely on your current income, credit and promise to pay. Credit lines and signature loans both qualify as unsecured loans. A car loan, on the other hand, is secured by the car itself. If you miss payments and default, the lender usually sends someone to repossess your car. You come out of your apartment one day and it's gone.
A signature loan is a personal loan and an unsecured loan. You document your promise to pay when you sign the loan agreement, hence the name. Signature loans typically operate as installment loans. You take out a loan for a specified period of time and make payments monthly until you’ve fully repaid the loan and the interest. Many lenders provide unsecured signature loans at fixed interest rates.
With signature loans you get the full loan amount upfront. If you borrow $5,000 for three years at 9 percent, you get the full $5,000 immediately when the loan closes. You would repay that amount over the loan period in equal payments that reflect the interest rate and principal. Your lender may give you a check or deposit the funds into your bank account depending on your agreement. The typical signature loan is for one to four years.
A credit line, or line of credit, is an unsecured loan. You get approved for a particular amount but only pay interest on the amount you actually use and don't have to provide collateral. Let's say you get approved for a $5,000 credit line and only use $2,000. You pay interest on the $2,000. You'll have a minimum payment amount that varies with the amount you’ve drawn from your credit line. The interest rate is usually variable and is based on a prime rate plus a percentage.
If you need money upfront, or think interest rates could rise significantly, or are concerned your situation could change, a signature loan might be your best option. Credit lines typically renew on an annual basis and can be cancelled if the lender believes your status has changed for the worse. If you need money periodically that you can pay back in a few months, a credit line may be better.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.