Pros and Cons of Personal Loans
Personal loans can be used for many reasons, but potentially high rates are among their biggest drawbacks.
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Head of Content, Personal & Student Loans 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 to determine whether one is right for you.
Compare the pros and cons of personal loans
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Pros of personal loans
Here are the benefits of personal loans.
Few restrictions on loan purpose
Unlike mortgages and auto loans, which have specific uses, borrowers can use personal loans for almost anything. You can use a personal loan to make a large purchase, consolidate debt or fund a wedding or vacation.
Let you spread out a large expense
If you don’t have the money to cover a large expense like a home renovation upfront, a loan can help you pay for it in smaller installments over time. Some lenders provide personal loans up to $50,000 or $100,000.
Helpful for high-interest debt consolidation
If you have high-interest credit card debt, you may be able to consolidate it and pay a lower rate with a personal loan. Not only can debt consolidation save you money, rolling your debts into a single loan gives you fewer due dates to remember, simplifying the payoff process.
Predictable payments
Personal loans typically have fixed annual percentage rates, meaning your payment amount stays the same for the life of the loan. A predictable monthly payment is easier to budget for than one that varies.
Fast funding
You can usually get a personal loan within a week of applying. Approval often takes up to a day and some lenders offer same- or next-day funding.
No collateral required
Personal loans are usually unsecured, meaning you don’t risk losing your property if you fail to repay a loan. Some lenders also provide secured personal loans, which may be easier to qualify for or have lower rates.
Rates can be lower than credit cards
Personal loans can have lower APRs than credit cards, especially if you have a high income and credit score. According to the Federal Reserve, the average interest rate on a two-year personal loan from a bank was 11.66% in the first quarter of 2025, while the average credit card interest rate was 21.37%.
On-time payments help build credit
Payment history accounts for 35% of your credit score. Reputable lenders report payments to the three major credit bureaus. Consistent, on-time loan payments can benefit your score.
Cons of personal loans
Here are downsides of personal loans.
Borrowers may need strong credit and income
Reputable lenders check loan applicants’ credit scores and histories, proof of income and debt-to-income ratios (DTI). The best rates go to borrowers with high credit scores, high incomes and little existing debt.
Though some lenders offer bad-credit personal loans, a score that’s too low (usually below 500), inconsistent income or a high DTI can prevent you from qualifying.
Increase your debt load
A new loan will raise your DTI, which can make it difficult to qualify for future financing, like a mortgage or auto loan.
No continual borrowing
With a personal loan, you get a one-time lump sum of money. If you need more money than the initial amount you borrowed, you’ll have to apply for another loan or find another way to get extra cash.
Lenders may charge origination fees
Some lenders charge origination fees on personal loans. An origination fee is an upfront fee — typically 1% to 10% of the loan amount — that covers the cost of processing your loan.
Lenders often deduct the origination fee from your loan balance, reducing the amount of money you’ll receive. Some lenders add the fee to your balance.
Bad-credit and online lenders are more likely to charge origination fees, while most banks and credit unions do not. Most lenders also charge late payment fees and non-sufficient funds fees.
Rates may be higher than other financing options
It’s important to compare all your financing options before getting a personal loan. Other, potentially cheaper, options include 0% APR credit cards and home equity financing (more on borrowing alternatives below).
Even if you find a personal loan that has a lower APR than a credit card, you may still pay more in interest. The reason is that you’re paying interest on the full loan, even if you don’t need the full amount, whereas with a credit card, you only pay interest on any balance you carry.
Potentially high monthly payments
Depending on how much you borrow and the length of your repayment term, your monthly loan payment could be higher than the minimum payment on a credit card, for example.
If you’ll struggle to make personal loan payments, a credit card may be more affordable month-to-month. However, making only the minimum payment on a credit card means you’ll carry a balance for longer, and likely wind up paying more interest overall.
Missed payments negatively impact credit
While on-time payments can build your credit, missed payments can hurt it. Most lenders report payments that are more than 30 days late to the credit bureaus. Even one missed payment can lower your credit score significantly.
When to consider a personal loan
A personal loan can be a low-interest financing option for good- and excellent-credit borrowers, but it isn’t always the best choice.
Consider a personal loan if:
- You’re looking to consolidate debt and qualify for a loan that has a lower APR than your existing debts.
- You’re repairing or updating your home and don’t want to use your home equity as collateral, or you don’t have enough home equity to finance the project.
- You’re making a major purchase and you want to spread out payments over more than a year.
- You’re facing an unexpected expense, like a big medical bill, and don’t have a lower-cost alternative.
Look at personal loan alternatives if:
- You want to consolidate your debts but don’t qualify for a lower APR.
- You’d struggle to fit the monthly payment into your budget.
- You’re making a purchase that you can pay off in less than a year, and you qualify for a credit card with a temporary 0% APR.
- You’re not sure how much you need to borrow.
How to get a personal loan
If you’ve decided that a personal loan makes sense for you, follow these steps to choose the best loan option:
- 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.
- Pre-qualify for a loan. This is a quick process that shows you your potential loan amount, rate, repayment term and monthly payment amount. It only requires a soft credit check, so you can compare offers from multiple lenders with no impact to your credit score.
- Submit your loan application. Your lender may require documents such as pay stubs, tax documents or bank statements to verify your income and other financial information.
Most lenders will complete the loan approval process and disburse funds within a week. If your loan application is not approved, the lender must send you information about why you were denied. You can use this information to improve your odds of getting a loan in the future.
» MORE: Compare the best personal loans
Alternatives to personal loans
If you decide a personal loan isn’t the right choice for you — or if your loan application is denied — consider other borrowing options.
» MORE: The best ways to borrow money
Zero-interest credit card
Credit cards with a zero-interest introductory period allow you to borrow money at no cost, as long as you pay the balance within that 15- to 21-month promotional period. If the 0% APR also applies to balance transfers, this could be a cheap way to consolidate debt.
If you can meet the qualification criteria (typically good or excellent credit) and pay the balance before the promotional period ends, you’ll have a shot at interest-free financing. There’s no equivalent with personal loans.
Home equity financing
Home equity loans and lines of credit (HELOCs) typically have low rates and repayment terms of up to 15 or 20 years, but they require your home as collateral, which means you could lose the home if you fall behind on payments.
If you’re a homeowner with enough equity to qualify, this type of financing can cost less than a personal loan. Just make sure you can afford the payments before using your home as collateral.
Personal line of credit
A personal line of credit is similar to a credit card in that it gives you a line of credit that you can borrow against and replenish multiple times, only paying interest on the amount you borrow. Unlike personal loans, which usually have fixed interest rates, most personal lines of credit have variable interest rates. Monthly payments also vary based on how much you owe.
Fluctuating monthly payments can be difficult to budget for. However, a personal line of credit can be a good choice when you’re not sure how much money you need, since you only pay interest on funds you use.
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.
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.
Family loan
Borrowing money from family or friends can help you bypass strict lending requirements and high interest payments. However, relationships can sour if you don’t pay the loan back on time or in full. Formalize a family loan by drafting and signing an agreement that outlines repayment terms, interest and other loan details.
Financial assistance programs
If you need money to cover essentials like rent, utility bills or food, consider local nonprofits that offer financial assistance programs, often at no cost. Charities might require you to be under a certain income threshold or show proof of need.
» MORE: Payday loan alternatives
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- 1. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 2. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
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