The Pros and Cons of Personal Loans: Should You Get One?

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A personal loan can help you cover an unexpected expense, spread out a large purchase over time or consolidate debt. However, it may not be the right financing option for every situation.

Evaluate the pros and cons of personal loans in order to determine whether one is right for you.

Personal loans allow you to borrow money for any purpose. With a personal loan, you receive the full amount upfront and repay it over time in fixed monthly payments. Personal loans can be an affordable way to pay for major expenses or consolidate high-interest debt. However, they aren’t right for everyone. Before taking out a personal loan, it’s important to weigh the pros and cons.

The Pros of Personal Loans

Here are some of the biggest advantages of personal loans:

1. Lower Interest Rates Than Credit Cards

The average credit card interest rate is currently around 20%, while the average personal loan rate is around 12%. If you have good credit, you may qualify for a personal loan with an interest rate as low as 6%

Consolidating credit card balances into a personal loan with a lower rate can save you money each month. Just make sure you don’t run the balances back up on your cards!

2. Fixed Monthly Payments

Personal loans come with fixed interest rates and monthly payments. Your payment stays the same each month until the loan is paid off. This predictability makes it easy to budget for a personal loan payment.

3. Multiple Uses

Personal loans can be used for almost any purpose Common uses include consolidating debt, financing home improvements, paying medical bills, or funding a major purchase. The flexibility of personal loans is a major plus

4. Fast Access to Cash

Personal loan lenders can approve applications and fund loans in a few days. This makes personal loans useful when you need money quickly for an emergency expense.

5. May Improve Credit Scores

Personal loans show up on your credit report. Making consistent, on-time payments demonstrates you can responsibly manage debt and will improve your credit scores over time.

Paying off credit card balances with a personal loan can also help your credit utilization ratio, another important factor in credit scores.

The Cons of Personal Loans

Personal loans also come with some disadvantages to consider:

1. Require Good Credit

To get the lowest personal loan rates, you’ll need good to excellent credit scores of 670 and higher. If your credit is fair or poor, you may not qualify or may pay higher interest rates.

2. Origination Fees

Many personal loan lenders charge origination fees of 1-6%. These fees reduce the amount of money you get to keep from the loan. Shop around for loans with low or no fees.

3. Can Add to Your Debt

It may be tempting to use a personal loan for unnecessary purchases instead of wise purposes like debt consolidation. This can put you deeper in debt. Make sure you have the financial discipline to spend loan funds responsibly.

4. Missed Payments Hurt Credit

Just as on-time payments can help your credit, missed or late payments will damage your credit scores. Defaulting on a personal loan hurts even more. Don’t take on a loan with payments you can’t afford.

5. Prepayment Penalties

Some personal loans charge prepayment penalties if you pay off the balance early. Make sure to check the loan terms before borrowing.

6. Shorter Terms Than Mortgages or Auto Loans

Personal loans typically max out at 5-7 years for repayment. Shorter terms mean higher monthly payments than what you’d pay on a mortgage or auto loan. Make sure you can afford the monthly payment.

6 Key Questions to Ask Before Getting a Personal Loan

Personal loans can be helpful financial tools when used wisely. Ask yourself these questions before applying:

Why do I need the money? Only take out a personal loan if you have a clear purpose, like consolidating expensive credit card debt or financing a home improvement project.
What will the monthly payments be? Use a personal loan calculator to estimate your payment amount and make sure it fits your budget.
What are the interest rates and fees? Compare loan offers from multiple lenders. Prioritize lower rates and fees.
What is my credit score? Know your credit scores. Good credit means better loan offers.
How fast do I need the money? Online lenders generally fund fastest. Banks take 1-2 weeks.
Can I afford to repay it? Don’t bite off more than you can chew. Make sure your income can support the monthly payments.

Tips for Getting the Best Personal Loan Rates

Here are a few tips to secure the lowest interest rate when you take out a personal loan:

Check your credit reports for errors before applying. Correct any issues to maximize your scores.
Compare offers from multiple top personal loan lenders. Rates and fees vary.
Consider adding a cosigner with good credit to potentially lower your interest rate.
Provide proof of income to show lenders you can afford repayment. Pay stubs help.
Pick shorter loan terms, which come with lower interest rates. But don’t pick terms you can’t afford.
Reduce credit card balances before applying. High balances hurt approval chances.
Ask about discounts for auto-pay, existing customer status, or paperless billing.

The Bottom Line

Personal loans offer an accessible way to get extra cash, but it’s important to weigh the benefits and drawbacks carefully. Make sure your finances and credit are in good shape, research lenders thoroughly, borrow only what you need, and stick to a repayment plan. Used correctly, personal loans can be effective financial tools. But if used irresponsibly, they can lead to a cycle of debt. Approach personal loans with caution.

Frequency of Entities:

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pros and cons of a personal loan

Buy now, pay later apps

Buy now, pay later services, such as Affirm, Afterpay and Klarna, are at-checkout financing options that allow you to break up a purchase into smaller installments that you pay over time, often without interest or fees.

Compare to personal loans: If you’re making a large purchase at a retailer that offers BNPL and you can afford the biweekly payments, using a BNPL app will likely be more affordable than an interest-bearing loan.

How to decide if a personal loan is right for you

A personal loan can be a low-interest financing option for good- and excellent-credit borrowers looking to consolidate debt or start a home improvement project. But it may not be the best option if you only qualify for a high rate or if you’d have difficulty making payments.

Here’s how to decide if a personal loan is the right type of financing for your plans.

Compare financing options. The best borrowing option is typically the one that costs the least in interest.
Compare personal loan lenders. Consider features like loan amount and length of the loan term — in addition to the interest — to determine if the loan works for your needs.
Review your budget, accounting for loan payments. Make sure you can comfortably afford to repay your loan. Use a personal loan calculator to estimate monthly payments.

The Pros and Cons of Personal Loans

FAQ

What is a disadvantage of a personal loan?

Before deciding to get a personal loan, you must consider potential downsides, such as high interest rates, steep fees and a hit to your credit score if used incorrectly.

Is there a risk to a personal loan?

Yes. Most personal loans require a hard credit check that can lower your credit score by up to five points. In addition to inquiries, failing to pay your loan on time could lower your credit score once the late payment is reported to the three major credit agencies.

Is it ever a good idea to take out a personal loan?

If you owe a substantial balance on one or more high-interest-rate credit cards, taking out a personal loan to pay them off could save you money. For example, the average interest rate on a credit card is 23.99%, while the average rate on a personal loan is 11.48%.

What are the pros of a personal loan?

Many personal loans can often be applied for and acquired quickly. This can be a major benefit if you’re in a pinch due to an unexpected expense such as a medical emergency or car repair. Depending on your lender, the money can be in your account and ready to use as quickly as the same or the next business day.