Advantages, disadvantages of personal loans
If you need to borrow money for something other than a car, a house or a college education, then a personal loan may be the right choice. There are a few advantages but also some disadvantages with personal loans when compared with other types of loans.
No collateral needed
One of the biggest advantages of personal loans is that you don't have to have any collateral. Personal loans are also called signature loans, because basically all the lender has to guarantee repayment is your signature on the loan documents. If you can't pay back the loan, the lender can sue you for repayment, but it can't repossess any of your property.
Lower rates than some unsecured loans
Another advantage of personal loans is that they have lower rates than many other types of unsecured loans and lines of credit. If you have good credit, your interest rate on a personal loan is likely to be in the high single digits or low double digits. That is lower than credit cards, which usually are around 20-25 percent and payday loans, which can have triple-digit rates.
Higher rates than secured loans
One drawback to personal loans is that they have high interest rates relative to secured loans. Auto loans, mortgages and home equity loans all have much lower interest rates because they are secured by property. Student loans typically have lower interest rates as well.
Small amounts, short payback periods
Another disadvantage with personal loans is that you can't borrow very much and you don't have very long to pay it back. Most lenders don't approve personal loans for more than $10,000, and you have five years or less to pay back the money. That can be a problem if you need a larger amount or need a lower monthly payment on your loan.
