Understanding Personal Loans
An unsecured loan is a loan that is not backed by collateral. Also known as a signature loan or personal loan.
Unsecured loans are based solely upon the borrower’s credit rating. As a result, they are often much more difficult to get than a secured loan, which also factors in the borrower’s income. An unsecured loan is considered much cheaper and carries less risk to the borrower. However, when an unsecured loan is granted, it does not necessarily have to be based on a credit score. For example, if your friend lends you money without any collateral, meaning something of worth that can be repossessed if the loan isn’t repaid, then your credit score has zero to do with it, but rather the value of your friendship is at stake. Therefore the real meaning of an unsecured loan is that it is not backed by any object of value and is lent to you based on your good name. For financial institutional purposes, they may want to look at your credit score because they are not your friend and it is strictly a business transaction, therefore your good name may be associated with your historical payment history on prior debt, reflecting in your credit score.
source: Wikipedia.com
Steps in receiving a Personal Loan
- Compare the type of loan and the characteristics. It makes no sense to compare a balloon loan with an unsecured personal loan or a payday loan as if they where the same. Each loan has distinctive features and you should take them into account in order to compare them efficiently.
- Payday loans do not usually show an interest rate, instead they advertise as a fee every hundred or thousand dollars. However, that fee can be explained as a rate and only then compared to other loan types.
- Consider the rate. Prepare for it to be one or two points higher so as to be prepared for variations and in the event that the loan rate remains the same or drops it would imply unexpected savings which is less dramatic than unexpected expenses that you have not budgeted
source: Wikihow.com
Questions about Personal Loans
Is the interest you pay on personal loans tax deductible?
Q: We had two personal loans this year totaling around $8,000 with interst of about 800. Is this tax deductible?
A: No, credit cards, car loans, etc. have no tax advantages whatsoever. When you pay off a school loan, there are some tax write-offs. so, it depends on the kind of personal loan…
Can you take out multiple personal loans?
Q: Most personal loans are $25,000 at max. If you need $100,000 for let’s say surgery, can you take out four loans from different companies or will the other lenders see you have more than one personal loan already out and deny your application? Serious and experienced answers only, please.
A: Yes, they’ll see the other loans. Multiple applications for loans can affect your credit score, which will affect the rate of your loan, so if you need $100K, and they don’t want to lend you more than $25K, you might consider putting up some collateral.
You should try to ask for the whole $100K from the lender you’d like to borrow from, and see what they need from you in order to lend you the whole amount. Also, banks generally have loan officers with different levels of lending authority; you might need to see the one that has the authority to lend $100K.
What are the tax liabilities for personal loans and gifting of money?
Q: If someone were to grant a large personal loan to someone else (100K or larger) what are the tax liabilities or responsibilities of the lender and the borrower – if any?
A: Under US tax law, the borrower has NO tax related to a loan. The lender would include the interest portion of payments in their total income for tax purposes, and pay the same rate as normal income. In the case of a gift, the receiver has no tax. The giver can give up to $12,000 per year to each recipient with not tax results. Above that amount, a gift tax return must be filed, but up to $1 million can be given in a lifetime before taxes are actually paid.