Pros and Cons of Personal Loans

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Compare the pros and cons of personal loans
Pros of personal loans | Cons of personal loans |
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Pros of personal loans
Few restrictions on loan purpose
Let you spread out a large expense
Helpful for high-interest debt consolidation
Predictable payments
Fast funding
No collateral required
Rates can be lower than credit cards
On-time payments help build credit
Cons of personal loans
Borrowers may need strong credit and income
Increase your debt load
No continual borrowing
Lenders may charge origination fees
Rates may be higher than other financing options
Potentially high monthly payments
Missed payments negatively impact credit
When to consider a personal loan
- 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.
- 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
- 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.
Alternatives to personal loans
Zero-interest credit card
Home equity financing
Personal line of credit
Buy now, pay later apps
Family loan
Financial assistance programs
Article sources
- 1. National Bureau of Economic Research. Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900. Accessed May 2, 2025.
- 2. Federal Register. Federal Interest Rate Authority: A Rule by the Federal Deposit Insurance Corporation on 07/22/2020. Accessed May 2, 2025.
- 3. Federal Reserve Bank of St. Louis. Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan. Accessed May 23, 2025.
- 4. Consumer Financial Protection Bureau. Truth in Lending Act (TILA) examination procedures. Accessed May 2, 2025.
- 5. Experian and Oliver Wyman. Financial Inclusion and Access to Credit. Accessed Jan 23, 2025.
- 6. Center for Responsible Lending. Payday and Other Small Dollar Loans. Accessed May 2, 2025.
- 7. National Credit Union Administration. Credit Union and Bank Rates 2024 Q4. Accessed May 23, 2025.
- 8. Federal Reserve. Military Lending Act. Accessed May 2, 2025.
- 9. Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. Accessed Jan 24, 2025.
- 10. Consumer Financial Protection Bureau. What is a payday loan?. Accessed May 2, 2025.
- 11. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Installment Loans. Accessed May 2, 2025.
- 12. Angi.com. How Much Does It Cost to Make My Home Accessible?. Accessed Nov 12, 2024.
- 13. Internal Revenue Service. Home energy tax credits. Accessed Mar 6, 2024.
- 14. Solar Energy Industries Association. Solar Power Purchase Agreements. Accessed Mar 7, 2024.
- 9. Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. Accessed Jan 27, 2025.
- 16. SolarReviews.com. Homes with Solar Sell for 6.8% More [2024 Zillow Data Study]. Accessed Dec 10, 2024.
- 17. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 10. Consumer Financial Protection Bureau. What is a payday loan?. Accessed Apr 4, 2025.
- 19. The Pew Charitable Trusts. Payday Loans Cost 4 Times More in States With Few Consumer Protections. Accessed Apr 4, 2025.
- 8. Federal Reserve. Military Lending Act. Accessed Apr 4, 2025.
- 21. Internal Revenue Service. Retirement topics: Exceptions to tax on early distributions. Accessed Apr 8, 2025.
- 22. Administrative Office of the U.S. Courts. Bankruptcy Basics. Accessed Apr 8, 2025.