What Is a Character Loan?

A character loan is a type of unsecured loan that is made because of the lender's 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 house.

How a Character Loan Works

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 character 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 or have owned a 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. They are repaid over a set term in equal monthly installments.

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 closely knit.

A character loan is an unsecured term loan made on the basis of a borrower’s reputation and credit, usually with a higher interest rate and fees than a secured loan.

Character Loans vs. Cash Advances

For people who live in bigger cities, character loans may not be an option. Fortunately, there is a modern-day version of the character loan: the cash advance. These often come from a credit card, but they can also come from other sources. As with small-town character loans, credit cards are unsecured by any collateral. 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 a loan. The issuer then decides on how large 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.

Due to their unsecured nature, character loans and credit card cash advances carry higher interest rates and fees than using a credit card to buy goods or services.