Are Personal Loans Bad? Not Always

Personal loans can be a bad choice if you have cheaper options. But there are good reasons to choose them, too.
Ronita Choudhuri-Wade
By Ronita Choudhuri-Wade 
Updated
Edited by Kim Lowe
Are Personal Loans Bad? Not Always

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Personal loans are not always bad. They can provide cash in an emergency or help pay off high-interest debt. If you work with a reputable lender and can afford to repay it, getting a personal loan can be a smart choice.

On the other hand, if the personal loan you’re considering comes with a triple-digit interest rate, or you have limited or unsteady means to pay it back, look for more affordable alternatives.

What is a personal loan?

A personal loan is money borrowed from a lender that you pay back in equal monthly payments, or installments, over a fixed term of about two to seven years. You can get personal loans from banks, credit unions and online lenders.

In return for borrowing, you pay interest on the loan. Interest rates on personal loans range from about 6% to 36%. Borrowers with good to excellent credit (scores above 690) are more likely to qualify and receive a rate at the lower end of that range.

Some lenders offer personal loans to consumers with fair or bad credit, but those borrowers should expect higher rates.

When is a personal loan a good idea?

A personal loan can be a good idea when you use it to reach a financial goal, like paying down debt through consolidation or by renovating your home to increase its value.

A personal loan may also make sense for large purchases that you don’t want to put on a credit card. Some lenders offer loans up to $50,000, and the fixed monthly payments can be easier to budget for than credit cards.

Most financial experts recommend against using a personal loan for discretionary purposes, like vacations or extravagant weddings. That’s because borrowing can be expensive, and you might still be paying for your wedding years after the honeymoon.

Saving is the interest-free way to pay for such expenses. If you must borrow, a personal loan may be the right choice when your income is stable enough to commit to a few years of monthly payments and you can get a lower interest rate than other financing options such as credit cards.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

When is a personal loan a bad idea?

There are a few instances when it’s better to avoid a personal loan:

It’s a no-credit-check loan: Lenders that don’t check your credit can’t accurately assess your ability to afford the loan. This means more risk for them and much higher interest rates for you. If your credit is bad, but you need to borrow, exhaust all other options first.

Managing debt is tough for you: A debt consolidation loan can ease your debt burden, but it requires that you use the loan to pay off your other debts and avoid taking on any more.

A good first step toward getting better at managing your debt is to follow a budget that accounts for needs, wants and debt payments.

You have cheaper alternatives: Even in an emergency, it’s smart to take a moment to consider alternatives. You could qualify for a 0% interest credit card if your credit is good. Medical debt may be covered with a payment plan. Your employer may offer a cash advance on your paycheck.

Is a personal loan bad for my credit score?

A personal loan can help your credit score if you follow the golden rule of managing your loan: Never miss a monthly payment. On-time payments, whether toward personal loans or credit cards, account for 35% of your credit score, and missing a payment will cause your score to drop.

Applying for a personal loan, which requires a hard credit pull, can lower your score by up to five points.

How to choose a personal loan

If you’re set on a personal loan, consider these factors to find the best loan for you:

  1. Estimate your payments: Use a personal loan calculator to estimate what you’ll pay in interest and monthly payments based on your loan amount, interest rate and repayment term. Factor those payments into your budget to ensure you can afford the loan.

  2. Compare rates across lenders: It pays to shop around for the best combination of low rates and fees. Many lenders let you pre-qualify to check rates, without affecting your credit by using a soft credit check.

  3. Weigh loan features: Some lenders have mobile apps where you can track your loan. Others offer flexible payment schedules that allow you to change a due date or defer a payment. If you’re consolidating debts, some lenders will send your loan proceeds directly to your creditors.

  4. Additional benefits: Take advantage of extras like free credit score monitoring, financial education resources and hardship assistance programs that may be offered by your lender.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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