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Personal 
Personal Loans: Costs and Risks
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Rates |
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Taxes | |||||||||||||||||||||
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Tactics | |||||||||||||||||||||
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The first consideration in taking a personal loan — whether through your bank, credit card or credit union — is the interest rate you will be charged. These rates can run from "teaser" rates of less than 5% (available, usually, for less than 5 months) to annual percentage rates (APRs) of more than 25%! |
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A significant disadvantage of personal loans is that the interest you pay is not tax deductible. Compare this with a mortgage or home-equity loan which is deductible — here, the government foots some of the bill. For example, an 8% mortgage rate might cost you only 5% after-tax. The same rate on a credit card would cost you 8% — even with the same stated interest rate, the credit card costs you significantly more. And if your credit card rate is a more normal 16%, you are actually paying an after-tax rate which is more than 3 times the rate on a mortgage. |
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Even if you receive a low teaser rate on a credit card, you won't have it for long. And, if you miss a payment, your rate will change immediately and dramatically — in addition to being assessed a late charge. Unless you need cash for only a short time, steer clear of credit cards entirely — avoiding them might be the single best investment you ever make! Personal loans from banks should generally be avoided, as well. Lines of credit, though not as expensive as the average credit card, are still expensive nonetheless. Overdraft protection on your checking account is useful, but only to avoid bouncing checks — with rates as high as 18%, these overdrafts should be paid off quickly. Margin debt on your stock portfolio should also be avoided, for reasons discussed in the Margin article. Bottom line: if you need to borrow for any reasonable length of time, take advantage of the tax deduction and lower rates available to you through a mortgage or a home-equity loan. |
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