A personal finance loan is a loan that has no collateral behind it. Unlike a secured loan such as a mortgage, in which the lender can try to make a recovery through possession of property, a personal finance loan offers no such security. These come in many different types with different interest rates and terms.
There are both advantages and disadvantages to personal finance loans. The interest rate can be considered an advantage or a disadvantage depending on what you are comparing it to. An unsecured loan generally offers higher interest rates than secured loans, but it will usually be more favorable than credit cards, which can be extremely high. For instance, Lending Tree reports that the interest on unsecured loans is often in excess of 10%. You can do better than this on mortgages and other secured loans, but credit card interest rates can go above 20%. Of course the more money you spend, the more this difference will be amplified.
You also lose money on unsecured loans as compared to secured loans because the interest is not tax deductible. On many loans that are attached to property, you can deduct the interest from your taxes, and depending on the size of your loan and tax rate, this can be quite substantial. You cannot get this benefit from an unsecured loan.
Some people get unsecured loans because it’s simply all that is available to them. Obviously, if you do not have a home, you cannot get a loan attached to it. If the choice is between this and credit cards, then you may be better off with this.
Different unsecured loans work in different ways. Some of them have a fixed term. This can be good for someone who wants the structure of having to make the payments at a specific time. For someone who wants to be sure to get out of debt and knows they will have the money available, this will be good. Some of them work more like credit cards and have a revolving line of credit. In this way, you can keep it going. The interest rates will be variable, however, and may change, making it a better or worse way.
Unsecured personal loans are offered by many banks and other financial organizations. With both advantages and disadvantages, they provide a unique financial tool for people. Evaluate your options, as well as other types of loans, when deciding whether to sign up for one.