What Are The Advantages and Disadvantages of Unsecured Loans

There comes a time in everyone’s life when they need some type of loan. These often tend to be stressful times because it usually means that you need money quickly to pay for some unexpected expense. One of the best ways to help eliminate stress during those unexpected times is to understand the options available to you. If you are already aware of the options, it makes those times easier for you. When you have more information you are in a better place to make the best decision for you at the time you need it.

There are a few facts you should understand about personal loans including the advantages and disadvantages of unsecured loans. Continue reading to find out all the information you need to make the best decisions for you.

Pros and Cons of Unsecured Loans

If you have not figured out by now, there are many advantages and disadvantages of unsecured loans. Before you visit loans shop online, you should understand all of the information, the good and the bad, about unsecured loans. You should not take on more debt without really thinking it through. You should keep in mind that this money is a loan and must be repaid. The lender is not just giving you money.

What Is A Personal Loan?

A personal loan is when a lender allows you to borrow money. When you borrow money from a lender, you are making a promise to repay the money. You repay by making regular payments each month of a set amount. The repayment length is anywhere from three to five months. The lender can be anyone from a traditional bank, a credit union, or even a family member. The lender charges you a fee for allowing you to borrow the money. The fee is called interest. an the lender sets the interest amount based on your credit score. The higher your credit score means the lower your interest rate may be. A personal loan can be used for any purpose you wish.

When you are interested in a personal loan, it is best that you do some loan shopping to find the lender with the best interest rate. There are many lenders available to provide you with a loan so you do not have to go with the first offer you find. There are many advantages and disadvantages of unsecured loans and you should be aware of all of them before you obtain a personal loan.

What Is the Difference Between a Secured and Unsecured Loan?

Secured vs unsecured personal loanI started this article by telling you how important it is to have as much information as you can about personal loans. One of the factors to understand is the advantages and disadvantages of unsecured loans, but you should also understand the differences between a secured and unsecured loan.

A secured loan is one that has collateral attached to it. Collateral is some type of asset that you own, such as a house or a car. It can also be some other item that has significant value, such as art or jewelry. A lender accepts your collateral to prompt you to pay back the loan on time. If you do not pay back the loan, the lender takes your collateral in place of your loan. In the case of a mortgage, you are offering your house as collateral and the bank can foreclose on your home. Once you repay the mortgage, the house becomes yours free and clear.

An unsecured loan is a loan that has no collateral as backing for the loan. The only thing that provides security for the lender is your credit worthiness, which is usually determined by your credit score and credit history. The interest rate for your loan is heavily based on your credit score. You can only be approved for some personal loans if you have a high credit score. A large percent of personal loans are unsecured loans. You can shop for unsecured personal loans online. You should do a lot of research when you want a loan, so you know what options are available to you.

Advantages of an Unsecured Loan

There are some benefits to consider about an unsecured loan when making the final determination about taking a personal loan. Unsecured loans are available to just about anyone, but you must qualify for the loan. Your credit score is the biggest piece of information that can qualify you. You do not have to worry about providing collateral for an unsecured loan because it is not needed. No type of collateral is accepted for an unsecured loan. You are able to get your money quickly, often as fast as a few days, because there is no need to appraise the collateral. An application for an unsecured loan can be completed in the same day.

Unsecured loans are great for those who do not have anything to offer as collateral. They are also good for those that may not have the best credit. You can also find unsecured loans online which makes researching them very easy. So you can fill out the application and upload documents all in the same online session. You can often be approved in the same day. Money is deposited in your bank account usually on the next business day. You are usually able to pay off your loan early, if you wanted, without any penalties.

Disadvantages of An Unsecured Loan

What kind of article about the advantages and disadvantages of unsecured loans if I failed to mention the disadvantages? People do not often like to talk about the bad stuff, but it is just as important to know when trying to make a decision like this.

One of the biggest negatives to unsecured loans is that many of them come with high interest rates. Unsecured loans have higher interest rates than secured loans. The lower your credit score is equals a higher interest rate. Lenders take on greater risk when they offer you unsecured loans. The lower your credit score means that the lender takes on even more risk. They are less willing to take on that risk when your credit score is low.

Unsecured loans come in limited amounts, so you may not be able to get an unsecured loan in the amount you need or want. A lender may only be willing to lend you a certain amount and it may not be enough for your needs. They typically do not have any flexibility. You probably will not be able to change the terms of your loan once you have agreed to the loan terms. Also, you may not be able to get a better rate on your existing loan. You would have to obtain a different loan for a better rate and pay off the first loan. An unsecured loan is still a loan, which means you are taking on more debt. Ultimately, that could negatively impact your credit score.

Are There Different Kinds Of Unsecured Loans?

In addition to many advantages and disadvantages of unsecured loans, you should also know about the various kinds of unsecured loans that are available to you.

There are personal lines of credit, which are loans that are open-ended. You can withdraw the funds you need as you need them over a specific period of time. Also, you can access the loans through a bank transfer or with a check. You are given a certain amount that you can borrow. They range anywhere from $1,000 up to $100,000. Interest only accrues when you withdraw the money and it only accrues on the amount of money that you withdraw. It only accrues until you pay back the money.

There are debt consolidation loans that can be unsecured as long as you have good credit. This type of loan allows you to combine all of your debts into one. You only have one payment instead of multiple different payments across many bills. And you may be able to get a lower interest rate with a debt consolidation loan than the high interest you pay on your other bills.

You can find loans to finance your wedding or a vacation. The interest rates may be higher on these types of loans, but they help you pay for something specific. You are able to reduce your stress by paying the money upfront for a trip or wedding and then make regular monthly payments.

You may also be able to get a loan to pay for a specific medical expense or need. Sometimes, these loans are harder to get and may have a higher interest rate. You may be able to get these loans from a medical provider or someone who only provides loans for medical purposes.

Are There Things I Should Avoid When It Comes To Unsecured Loans?

There are a few types of loans that you may want to avoid when it comes to personal loans. While there are advantages and disadvantages of unsecured loans, some loans have more disadvantages.

There are short term cash loans that are geared towards those who have poor credit scores. Just about anyone, with any type of credit, can be approved for these types of loans. They have repayment periods that are incredibly small. You have to be sure that you can repay these loans. These types of loans can put you in a bad financial position. You usually have to pay back the money in two weeks or less. If you do not pay back the money timely, you have to pay high fees or additional charges. You may need to take out another loan to cover the first one. That puts you in a dangerous cycle. These loans have sky-high interest rates.

There are also payday loans. These are also geared towards those that do not have the best credit. These loans are for smalls amounts. You have to repay them when you get your next paycheck. You have to provide a paycheck as proof of how much you earn with each paycheck. This also indicates to the lender how much they are willing to allow you to borrow. They do not let you borrow more than you make per paycheck. These loans also have high interest rates.

These types of loans often make things worse for you. Both of these types of loans are limited to small amounts. The low amounts limit how much you borrow. They may not cover all the debts you owe. You may have to take out many loans of this type. Every loan you have puts you further into debt. This may put you into a situation you cannot get out of.

What Should I Look For in an Unsecured Loan?

There some other things that you should look for when you are deciding about unsecured loans. In addition to all the advantages and disadvantages of unsecured loans, you want to understand the type of loan to which you want to apply. You should also know what the eligibility requirements are for a loan you are interested in. And you should know if the loan has an application fee or penalties for paying off the loan early.

You should make sure you have a clear understanding of the annual percentage rate (APR). This is the interest rate in addition to the origination fee that you are charged for borrowing the money. The better credit score that you have means the better interest rate you receive. The lender may be offering you a promotional rate, so you should understand how long the promotional period lasts. You should also understand what happens when the promotional period ends and if your interest rate increases. The interest rate may get so high that you may no longer be able to afford to repay the loan. The length of time you have to repay the loan can vary from one, three, or five years. The longer you have to repay the loan usually means that your interest rate is going to be higher.

Most loans have fees associated with them, so it is important for you to understand what fees are associated with your loan. You may have fees because you made a late payment, processing fees, and early payoff. There may be other perks or bonuses that can come along with your loan. You should be aware of all of those before you sign your loan agreement.

What Do I Need to Apply for an Unsecured Loan?

When you apply for a loan, there are a number of documents that you may have to provide to a lender. It is helpful if you have all of these documents available before you apply for the loan. This way, you already have them and you will not have to look for them. The first step you have to take is you need to fill out the application for the loan. No matter what type of loan you want and from which lender, you always have an application.

You have to provide proof of your identity. The lender needs to know that you are who you claim to be. Usually a valid photo identification card, such as a driver’s license, state ID, or military ID, should be sufficient. You may also need to provide proof of income, such as paystubs. You may also need to provide bank statements to show that you have the money to repay the loan. A lender may ask you to provide other documents to them. No matter what the lender asks you to provide, it is important that you do so quickly. If you do not provide them what they need within a certain period of time, it may a reason for them to deny your loan.

While you are going through the application process for a personal loan, when it seems that the lender is being difficult with their requests, keep in mind that this is another on the list of advantages and disadvantages of unsecured loans.

Do My Savings Impact an Unsecured Loan?

There are many advantages and disadvantages of unsecured loans as I have described throughout this article. It is important to have savings. However, those savings most likely will not help you be approved for an unsecured loan. When you create a budget, it gives you a clear idea of how much money you can save each month. It also gives you an idea of where you are spending all of your money each month. This also shows you where you can save money. You can cut out spending by reducing the number of times you eat out per month. It is a great way to reduce spending and increase your savings.

While there are many advantages and disadvantages of unsecured loans, you should still focus on your savings while determining if a personal loan is right for you. If you are able to cut your expenses enough, you may decide that you no longer need a loan.


This article gives you a lot of advantages and disadvantages of unsecured loans, but you still must make a smart decision when it comes to unsecured loans. You have to decide if you can afford to repay the loan. If you cannot, it is not a good idea for you to take on a personal loan. The best way for you to decide this is to create a budget for yourself to see how much money you can afford to repay each month. Even though there are many advantages and disadvantages of unsecured loans, you should not rush into this decision.


Are Personal Loans Considered Taxable Income?

Young man using calculator for calculating family budget cost bills on desk in home office.

There comes a time in all of our lives when we need extra money fast. While it may be easy to get a consumer loan, you probably have some questions. Since you get money when a lender approves you for a loan, you may wonder are personal loans considered taxable. The short answer is no, a personal loan is not taxable income and you do not have to pay income taxes on that loan. Continue reading to find out more.

Do I Have to Pay Income Taxes on a Personal Loan?

For the most part, you do not have to pay income taxes on personal loans. The typical way a personal loan works is you borrow the money. Then you repay the money on time with interest. This scenario does not consider a personal loan to be taxable. There is one exception when a personal loan is taxable.  If you the personal loan is a cancellation of debt, or the lender forgives the loan, this means you do not pay back the money. In this instance, the personal loan you received is considered income and you have to pay income taxes on the amount you borrowed. If you were wondering are personal loans considered taxable, this is one of those situations when they are.

What Are Income Taxes?

Income taxes are taken out of every one of your paychecks. Your employer takes the money out of your check before you ever see your money. This makes it easy for you so that you do not spend the money before you pay your taxes. If you are self-employed, you are responsible for paying your own taxes. Income taxes varied depending on how much income you make and typically the percent of taxes you have to pay increases with how much income you have.

5 Highest Personal Income Tax States for 2021
  1. 1. California - 13.3%
  2. 2. Hawaii - 11%
  3. 3. New Jersey - 10.75%
  4. 4. Oregon - 9.9%
  5. 5. Minnesota - 9.85%
Source: turbotax.intuit.com

What Are Personal Loans?

A personal loan has many names, such as fast loans and unsecured loans. You can even obtain unsecured personal loans online. No matter what you call it, the basic premise of a personal loan is a lender lets you borrow money. The lender can be a bank, credit union, or even a family member. They allow you to borrow a certain amount of money with your promise to pay them back with a regular monthly payment. The lender charges interest on the money you borrow as a fee for letting you borrow the money.

Typically the repayment period is anywhere from three to five years. For a typical personal loan, the monthly payment remains the same each month. Since you are receiving money, some often wonder are personal loans considered taxable income? Since you are repaying the full amount of the loan (and then some), personal loans are not considered taxable income and you do not have to pay any type of taxes on the money you receive.

What Is Considered Income?

Taxable income is any money that you receive from earned or unearned income. Earned income is money that you receive for work or other services provided. This includes wages, fees, and tips.

Unearned income is a little trickier and not all unearned income is taxable. Types of unearned income that could be taxable are lottery winnings, bonuses, profits earned by selling assets, and stock dividends, just to name a few.

Keep in mind that taxes are paid on your gross income. Gross income is the amount of money you earn before any money is taken out. Net income is the amount of money that goes into your bank account after all deductions and withholdings. You may still be wondering if personal loans considered taxable income, and they are not.

What Happens if I Do Not Pay My Income Taxes?

You should be clear on one thing, the Internal Revenue Service (IRS) will get their money. You should make every effort to pay your taxes. That said, IRS really wants to work with you to ensure you pay your taxes. It feels like they are working against you, but they really are not. It is key to understand what is considered income and the amount on which you owe taxes. You should know if personal loans considered taxable income.

The most important thing is to file on time. IRS hits you with heavy penalties for not filing on time. If you owe money, you should pay it. If you cannot pay it all at one time, set up a payment schedule with IRS. They are willing to work with you, especially if you show intent to pay. If you do not pay, you are hit with penalties and interest charges. The interest accrues every day until you pay them back.

Can I Use a Personal Loan to Pay My Taxes?

You can use a personal loan for just about anything you want. So, yes, you can obtain a personal loan to pay your taxes. However, just because you can does not always mean you should. You still need to make sure it is the smartest decision for you. Since as long as you pay them back IRS does not think personal loans considered taxable, so you will not have to pay additional taxes. You should determine how much you will pay to the IRS in fees and interest.

You should also consider how much you can pay them per month and for how long before your debt to them is paid. Once you know those numbers, you can determine how much you would pay in interest for a personal loan. Once you know that, you can determine your monthly payment. You can compare the numbers for both and determine which one is more favorable for you. You may decide that a personal loan is a way to go. This is only true if you can afford to make the monthly payments.

Does My Credit Score Impact My Taxable Income?

No, it does not. Your credit score does not impact the amount of income taxes you pay. It is based solely on the amount of money you earn. IRS does not think personal loans considered taxable income. The IRS does not particularly care about your credit score. They are only concerned about getting their money from you. The good thing about this is the IRS does not check your credit score when they set up a payment plan with you. Your credit score does not impact the fees or interest that the IRS charges. Another point of note is that the IRS does not report anything to credit bureaus, so setting up a payment plan does not lower your credit score.

Why Does My Debt to Income Ratio Matter?

Your debt to income ratio makes a difference when it comes to matters of obtaining credit, or loans. It does not particularly impact income taxes, or how much you have to pay in income taxes. It does come into play if you are considering obtaining a loan to pay any taxes that you owe.

Let me give you just a little bit of information about debt to income ratio, so you understand how it is determined. Your debt to income ratio looks at how much money you owe per month versus how much you earn. It is the amount of your gross income per month that is for rent/mortgage, credit cards, and other debt. Your gross income is what you earn before taxes. Most lenders want your debt-to-income ratio to be less than 43 percent of your income.

Are Taxes Different for a Small Business?

Taxes for a small business are different from income taxes for an individual. Depending on how your business is organized determines what types of taxes you are paying. When there is more than one person in the business, it needs to be recognized as a partnership. However, to make this simple, I am going to focus on taxes for someone that is in business by himself.

In this case, you are considered a sole proprietor. The rate you pay is the same as the personal income tax rate. As with an individual, IRS does not think personal loans considered taxable income. You do, however, have the ability to make different deductions when you are a sole proprietor than when you are an individual. There are some additional forms that you must fill out when considered a sole proprietor. The Schedule C is one of those forms.

What Is The Schedule C?

While the Schedule C may seem daunting to you, it is one of the most useful tools in your arsenal as a sole proprietor. It is the front and back of one page. This is the worksheet that allows you to itemize all of your expenses and deductions associated with your business. It is basically your total income minus your expenses and that equals your profit. You should keep your receipts and track any mileage that you plan to claim at the end of the year. At the most basic level, everything you buy for your business and every training you attend may qualify as a deduction.

Can I Avoid a Personal Loan?

Even though the IRS does not think personal loans considered taxable income, they still may not be right for you. Some of you may be thinking, I really do not want to take on any more debt. Or you may not be able to afford any more payments. In those cases, avoiding a personal loan might be best for you.

Let us talk about some other options for just a few moments. You could try to save the money you need in an effort to avoid a personal loan. If you cannot pay your taxes, you can set up a payment plan with IRS so that you are paying them a regular monthly amount. This does not require you to take on any more debt. It does not require a credit check and has no impact on your credit rating. You could also borrow money from family or friends. This also will not impact your credit score and they may not charge you any interest, so you can save some money.

Do I Really Need A Budget?

Another big thing you can do to avoid a personal loan is create a budget. I already know what you are thinking. No one likes that word. People think of a budget as a bad thing. I encourage you to look at it as a positive thing. It puts you in charge. You get to decide what is most important to you and work towards those goals. It is a way to take a hard look at where your money is going and make positive changes. This is your chance to see that you are still paying for a gym membership that you never use. You can take action to cancel that membership.

You must create a list of all of your expenses. Be sure not to leave any one of them out. This way you can see how much money you are spending each month and how it compares to how much money you earn each month. You might be surprised by what you see. When you do the math, you can determine how much money you have left over each month.


People always get scared when it comes to taxes. They really are not that scary. There are some key points to help make filing taxes as easy as they can be for you. Make sure you file on time and get assistance when you need it. I have already told you that the IRS does not think that personal loans considered taxable income, so you do not have to pay income taxes on them. There are many other details when it comes to taxes that may be helpful to you for saving yourself from paying a higher amount of taxes.

In addition, when you have to pay a large amount of taxes, you may want to consider a payment plan with the IRS. You could also consider taking out a personal loan to pay off the taxes. This way you do not have to deal with the IRS. Each situation is different. You should make sure that no matter which path you go down, it makes the most sense for you.