What is a 'Character Loan'

A character loan is a type of unsecured loan which is made by faith in the borrower's reputation and credit. Borrowers are typically able to obtain only small loans by this method. If the borrower is unable to repay the loan, the bank will most likely encounter considerable difficulty in recovering the loaned funds. Unsecured character loans are in contrast to secured or collateralized loans. With secured loans repayment of funds is securitized by a valuable piece of property or equipment such as a car or a house.

BREAKING DOWN 'Character Loan'

Character loans are often called signature loans because they are secured only by the borrower’s signature. Such loans are sometimes available from local banks and credit unions, particularly to longtime customers of the institution. To qualify for a signature loan, applicants typically need to demonstrate outstanding credit history and financial integrity. Lenders will be impressed by applicants who own local businesses, have been employed at the same firm for many years, and those who have owned their home for a long time. These acts indicate the individual has undeniable roots in the community. Also, character or signature loan amounts are typically less than $10,000.

Character loans tend to occur in small towns where local bankers know the borrowers personally. In this way, the banker can attest to the individual's character and feel comfortable taking the risk of an unsecured loan. These loans also remain popular on many Caribbean islands where communities are small and close-knit.

The Modern Option for Character Loans

For people who live in bigger cities, signature loans are probably not an option. Fortunately, there is a modern-day version of the character loan which is a cash advance. Cash advances often come from a credit card but can come from other sources. Like small-town signature loans, credit cards are unsecured by collateral such as a home or car. If you don’t pay back the cash advance, the card issuer has nothing to take back.

Before obtaining a credit card, the issuer checks the borrower's credit report and determines how likely they are to repay the loan. The issuer then decides on how large of a credit line it will allow. Borrowers with poor credit or no credit may be unable to obtain a credit card or may receive only the minimum credit line.

Character loans and credit card cash advances carry higher interest rates and fees than using a card to buy goods or services.

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