Advantages and Disadvantages of a Personal Loan

Advantages and Disadvantages of a Personal Loan

If you find yourself running short on cash, you may want to consider a personal loan as an option that is available for you to use. However, a payday loan may not always be the wise choice, so take the time to understand all you need to know about a personal loan before signing on the dotted line.

Characteristics of a Personal Loan

A personal loan is an unsecured loan. You will not be putting up anything of value so that the lender can cover the money they provided for you in the case you are unable to pay it back. They will not be able to repossess your home or car or put a lien on it. Here are some other characteristics of a personal loan.

* Higher Rates. Due to the fact that private loans are not secured by any kind of collateral, interest rates are going to be higher than on a secured loan. Secured loans are those that provide a mortgage or home equity loan or a new car loan. However, the rates are considerably lower than rates on credit cards.

* They come with a fixed term. That means that they come due on the date specified in the transaction. The interest rate is fixed as well.

* When requesting a private loan, you may be offered a revolving line of credit instead. At times, a personal loan can work the same way a revolving credit line would like and that is similar to a credit card. In this type of case, the interest rates would vary.

* You will not receive any tax benefits from them since the interest that is paid on payday loans are not deductible. This is unlike a mortgage where the interest is deductible.


For those who need to take out a loan but do not have enough equity in their home or do not own a home at all, using a personal loan may be a good option when you need some extra money. Since payday loans typically come with a fixed interest rate and a fixed payoff date, this may be the kind of discipline you need to make your payments on time and get it paid off within the specified time frame. You can benefit from loan over using a credit card since the rates on any credit card is higher than a payday loan after the teaser rates expire.


There are some disadvantages to taking out a personal loan that should be considered. Other than the fact that you will not be able to use the interest paid as a deduction, those same interest rates are likely to be above 10 percent. The typical home loan rate is 6 percent or lower which means that you will be paying more for a private loan than you would if you used your home as collateral.

In some situations, a personal option is an acceptable way to meet your financial needs. The wise consumer will never abuse the privilege of using a personal loan.

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