The FICO score works out to a number between 400 and 800 . In this case, it’s better to have a higher number. Several different factors go into the credit score, but one of the most important is your timeliness in paying bills. The difference in interest rates (APR) for people with different credit scores is quite significant.

In the example the Fair Isaac web site used to use, a person with a score of 500 to 599 could expect to pay close to 9.28% APR for a loan, while a person who had a score of 720-850 could acquire the same 30-year fixed-rate mortgage for 5.771% APR. Over the course of a 30-year mortgage, this amounts to a huge difference in payments.

On a $150,000 loan, the lower interest rate of 5.771% would make the monthly payment $877 and the total interest paid  (cost of borrowing) would amount to $165,850. If the person with a lower credit score applied they would have a loan payment of $1,238 and the total interest payment of $295,772. A difference of over $100,000 over the course of the loan would be the result.

The Principles of a Signature Loan

The biding principles of a signature loan are as follows. You must have a high FICO score in the range of 720-760 (or higher), and you must have full-time employment and have been living at the same residence for over three years. These are just some of the criteria you must have before even considering this kind of loan.

With a signature loan you don’t need to have collateral or any kind of asset involved as far as the bank tried to secure your funding. The truth is that most people cannot be approved for such a loan because they’re credit rating just isn’t strong enough.

Often we have visitors at CLF who are looking for signature loan and they have bad credit, and using these words in the same sentence is a perfect oxymoron – it just isn’t going to happen.

Alternatives to a Signature Loan

If you are one of those applicants who suffers from a poor credit rating there are alternatives to a signature loan. If you have some form of security you can provide to the bank such as a car or real estate then you have an opportunity to possibly gain approval with your local bank or online non-conventional lender.

If you only need a quick $5,000 or $10,000 you can likely get approval and have the moneys in your checking account within a week if you can apply for a loan using the equity in your house or the value in your car or boat, or anything else that has appreciable value.

As I have mentioned in other articles there are some scaled-down lending types such as car title loans, payday loans (usually as high as $1500), and pawn shops. I know that pawn shops have a nasty reputation as so do payday and car title loans but they are legal forms of lending and the free world, so I would be remiss if I did not mention them. If you can afford to avoid these types of loans you should but sometimes that just isn’t another alternative.

History of the So-Called Signature Loan – The Promissory Note

Signature loans to have a history in the modern world in countries such as the United States, the United Kingdom, Australia, Canada, New Zealand, and many many more countries. It goes back to what used to be called a promissory note.

From the dawn a lending and banking it has always come down to what was called a promissory note. Centuries ago a promissory note could be nothing more than what it sounds like – a note of paper with your mark on it (a mark if you couldn’t write or signature if you could write) promising to repay the loan or advance at a certain time, for a certain cost, and certain place.

Promissory notes were used for simple trading in the 1800s between farmers and service providers. For example, a wheat farmer who needed to feed his family through the treacherous, cold, and barren winter would give a promissory note to a sheep farmer stating that he would repay the sheep farmer in bushels of wheat during the summer harvest if he could take a sheep to his family to make woolen clothing from the hide and stockpiled meat for the winter.

This would be the true essence of how signature loans came about. In many other countries the promissory note was not use of all and a simple handshake and verbal promise was all that was required to make a trade that concluded at a later date.

In Conclusion

You will most likely need to be looking for approval with a non-conventional lender unless your FICO is excellent, you have equity, and you have “bankable” employment.

Because of the current state of the US economy, and the current willingness of conventional lenders to lend money, it’s a simple scenario. Two situations for a signature loan;

1. consumer financing company with near-perfect credit rating and payment history (reasonable APR)
2. non-conventional lender (extremely high fees and high APR)

Kevin did is due diligence by the bank and ran the credit score numbers for both Mark and Shirley.  He discovered that Mark’s FICO score was 720 (very good) and Shirley’s FICO score was 685 (still good but damaged to some degree).

Kevin said that there were many factors involved when approving a loan and that her FICO score may not affect the overall status of their loan application.

He explained to them how factors come into play on a loan application from many different sources.  Kevin explained that the fact they were both employed for over 15 years and had never defaulted on a mortgage payment, car loan payment, or lease payment in those 15 years was a a positive point of fact on their record.

Both Mark and Shirley have steady jobs and they have both been employed for over a decade.  Mark has been an aerospace engineer for 17 years and Shirley has been a secretary or an big company for over a dozen years.  Both of their jobs are in strong sectors and their seniority levels and work history have been stellar.

Furthermore, Mark and Shirley have a very low personal inflation rate which is also taken into account when applying for a loan.  Because they don’t have children living with them anymore their personal inflation rate is lower than younger families, and the banks look at this when deciding whether or not to approve a loan.

So to sum up, Mark and Shirley make over $100,000 a year in gross income from their employers combined and their take-home money on that yearly gross income is $65,000.  They do have a mortgage on their home of $170,000 and their payments on that home are just under $1000 a month.  The equity they have in their home is over $450,000 and this is very encouraging as far as the bank sees it, because the bank sees this equity as possible collateral.

This is the rub – Mark and Shirley are not willing to put their home-equity down as collateral (security) for their vehicle loan.  They wanted to make a down payment of $10,000 cash and then make monthly payments every month towards the principal and interest on the loan.

For this scenario, the only collateral that they were willing to provide to the bank, for security, was the value of the brand-new vehicle they would be driving (in this case a brand-new 2008 BMW SUV).

This did not mean that the bank would not give them the loan, but the bank would not make a rash or quick decision on the loan based on their income and their spending and credit history.  They would wait a day or two so that they could gather reliable data on Mark and Shirley before making a decision on their loan application.

“Kevin the loan officer” did ask Mark and Shirley if they had thought about using dealer financing and Mark explained to Kevin what their decision was – that they believed they could get a better APR (lower APR) with their local branch then with a dealer.  Kevin agreed to this and nodded his head to show his understanding of Mark’s theory.

Kevin took down all of Mark’s and Shirley’s information and told them that they could make an appointment to see him in three business days.  Kevin would have all of the information he needed to make a decision on their loan application.

So it was back home for Mark and Shirley while their local Bakersfield branch made a decision on their loan application.

They were called two days later and Kevin explained that they should come into the bank for signing papers and getting the loan under way.

Mark and Shirley were very excited to know that it looked like they were going to get the loan they needed for their new BMW SUV.  Unfortunately when they got to the bank the loan officer (Kevin) had one of his superiors in the office with them. (As it turned out this was the bank manager).  He quickly cut to the chase and tried to convince Mark and Shirley to use their home-equity as collateral on their car loan.  Mark and Shirley both stuck to their guns and declined.

The bank manager (they soon realized his position) said that they could not provide them their funds for their vehicle purchase and that his bank would only approve the loan if they provided their home-equity as collateral.  As you can see they were in a stalemate position and negotiating was pretty much over. Mark nodded to his wife Shirley as if to say, “let’s get out of here.”

And so they did.

In a huff of emotion Mark steered his vehicle off of the normal route which leads them to Southern Bakersfield (home) and turned the other way towards the dealership where their BMW sat on the lot.  Mark walked briskly into the dealership’s main showroom area and asked for the car salesman he had been talking to two weeks earlier.  The car salesman came out of the back office (or lunchroom it looked like as Kevin’s mouth was full), and greeted Mark and Shirley with hearty handshakes and a wide smile.

Mark explained that he could not get conventional auto financing from his major bank and that he was going to change all of his accounts to a new bank including his mortgage and retirement savings, and that he would accept the dealer financing at the higher percentage rate.

The car salesman at the dealership soon told Mark and Shirley that the LIBOR (the index the BMW dealership was using for it’s rate index) had dropped and they were lowering their lending rate by half a point.

This was good news because now they’re dealer financing would be 6.5% instead of 7% as they were told by the dealership’s financing department last visit. Mark went back to the dealership’s finance office and began filling out forms. He gave them a check for the down-payment on the SUV, and left to go home with Shirley.

On the way home in the car they both discussed how they felt they had made a decision based on emotion instead of going to yet another conventional bank in Bakersfield beside their branch.

They both agreed that their decision was quite hasty and made under the wrong circumstances. However, they both were happy that all their running around and head scratching was over. They had their SUV that they wanted (the vehicle of their dreams) and with an APR of 6.5%. This APR was the true APR – so more accurately their EAR (effective annual rate) was 6.5%.

Now as part of the California Loan Find tradition we’ll do the math on this auto loan:

• Principal Amount of Auto Loan = $79,000
• Total EAR after APR and fees =  6.5%
• Length of Term = 5 years
• Payment Periods = every 14 days (bi-weekly)

Using the CLF calculator (to the right of this article) we come up with these results:

Auto Loan Calculation Results:

Total Amount to be payed: $91,936.15
Total amount of interest and fees on auto loan: $12,936.15
Auto Loan Bi-weekly Payments: $705.26

This enabled them to look for a loan at the conventional banks as well as a private lenders with no worry of being declined.  However, they wanted to find the best interest rate possible – the lowest possible APR with the best possible terms from lender they could trust not too attach erroneous fees and balloon payments (although balloon payments are usually a problem with mortgages).

They thought about going to dealership for their financing right there in Bakersfield but opted out of that idea and started moving towards conventional banks.

They made an appointment with a loan officer at their local branch in Bakersfield, and the day they went in for their meeting with their loan officer they discovered that Shirley had damaged her credit rating.  This concerned them greatly because they knew the bank would give them a lower APR than the dealership but their bank would likely only lend to applicants that had an excellent credit history.

Ironically Shirley’s credit rating was damaged because she forgot to make a payment on her Target REDcard.  She found out that her Target card and not been paid for over three months and the amount she owed on this card was $78.39.  That $78.39 caused her enough of a problem on her credit score to make her a so-called undesirable by the banks.  (I know this sounds ludicrous, but believe me, it doesn’t take much to damage your credit rating – just miss a few payments on a credit card and you’ll find out what I mean).

So the day Mark and Shirley went to their meeting with a loan officer they were quite discouraged and disheartened because they thought they would not be able to afford the vehicle that they had both been dreaming about.

They were fortunate in that they both had the same idea about the vehicle they wanted to buy – a 2008 BMW SUV in bright red.  The price tag on the BMW SUV was a mere $80,000, and with both of their credit ratings in good standing, and both of their monthly incomes involved in the loan application, they would have been fine.

But unfortunately it was looking like Mark’s credit rating was the only one in good standing and therefore they may not be approved or the full $80,000 they needed for their vehicle.

The dealership said that they could get approved with dealer financing for 8% APR (annual percentage rate) but that was not good enough in their eyes and thought they could do better if they got their loan from a conventional bank.

Their bank in Bakersfield (which we have omitted for privacy reasons) is a major national Bank and they both have all of their accounts in that bank including their mortgage and their retirement savings.  They were comfortable about their meeting in that respect, in that they had a long-standing relationship with their local Bakersfield branch of a major national conglomerate, and hoped their past history of making payments and using frugal spending habits would endear them to the powers that be and surely help them get approved for their vehicle financing.

When Mark and Surely stepped into the loan officer’s office they made themselves comfortable on the two chairs that were available, and the loan officer introduced himself as Kevin.  Kevin asked them what they were there for and what he could do for them. Surely laid out all of the details in their hopes to buy their new BMW SUV.

They were both upfront and explained that Shirley had recently found out her credit rating had been damaged by neglecting to pay a credit card debt she uses from a local Bakersfield Target store on Wible Road.  Kevin (their loan officer) said he understood and told them that this may cause them some grief with their loan application, but he would do the best he could to get them approved for the amount of money they required on their vehicle purchase.

Kevin used the bank’s database to do a quick search on their past payment history and their past earnings history, and as well their monthly spending habits.  He said he was impressed with Marks and Shirley’s past credit history and that he would talk to his superiors to put a good word in for them on their application process.  This was music to Mark’s and Shirley’s ears as they were really hoping they could get approved for the funds they needed for their BMW.

End of part 1 – read on in part 2