To get ahead you have to stay informed.


The Pros and Cons of Personal Loans


Whether you're looking to upgrade your home, consolidate debt, or cover unforeseen expenses, you might be thinking a personal loan would be a good idea for financing.

Our deep dive into the pros and cons of personal loans is here to help you work out the details.

What Is a Personal Loan?

A personal loan is a type of installment loan that you borrow in a lump sum and pay back over a set number of monthly payments. You can apply for a personal loan through a credit union, bank, or online lender.

Pros of a Personal Loan

Applying for a personal loan can be relatively easy, and if you're approved, the processing time and funding turnaround can be as fast as 24 hours in some cases.

Here are some more advantages of taking out a personal loan.

Pro: Financial Flexibility

You can use personal loan money to cover almost any cost. Some common reasons borrowers take out personal loans include:

  • Debt Consolidation: You may be able to lower your monthly payments and overall interest by combining multiple debts into one debt-consolidation personal loan.
  • Home Improvements: Borrowers are often quickly approved and funded for personal loans, so these types of loans are ideal for household purchases or projects, from new appliances to full-scale additions.
  • Life Events: Go ahead and create the wedding of your dreams or take the trip of a lifetime — a personal loan can help you shape lifelong memories with manageable monthly payments.

Pro: Competitive Rates

A loan rate is generally considered good if it's below the national average. Personal loan annual percentage rates (APRs) are often lower than standard rates for credit cards, personal lines of credit, and other types of loans.

Pro: Collateral Not Required

Collateral is another word for personal property or real estate owned by you that a lender can take if you default on their loan payments. Most personal loans tend to be unsecured, which means you don't have to provide a lender with a form of collateral like your home or car to back your loan. Without the security of collateral, lenders may charge higher interest rates for unsecured personal loans as compared to secured loans. On the bright side, you won't lose your assets for missing loan payments!

Pro: Qualifying Credit

Borrowers with a minimum credit score of 580, which often ranks as "fair," may qualify for a personal loan. However, the higher your credit score, the more likely you are to land better credit terms, such as a lower monthly payment and less interest paid over the life of your loan.

Pro: Predictable Monthly Payments

Personal loans have set repayment schedules and most often have fixed interest rates, though you may have the option to choose a variable rate. With a fixed-rate option, your loan interest rate and payment amount will stay the same each month. Fixed-rate loans also make it easy to fit repayment into your monthly budget.

Cons of a Personal Loan

Considering potential drawbacks is also key when deciding whether a personal loan might work for you.

Con: Possible Fees

You may be required to pay certain fees when you take out a personal loan, including:

  • Application fee
  • Loan origination fee
  • Prepayment penalty
  • Nonsufficient funds (NSF)
  • Late payment fee

Make sure to talk to your lender so you're completely clear on fees. It's a good idea to ask what fees are associated with your loan upfront so you know if the overall repayment is worth it. And check to see which fees can be waived — you'd be surprised what you can get waived if you do a little digging and speak up (research online or talk to friends and family to see how others were able to get fees waived).

Con: Higher Interest Rates

Since most personal loans are not backed by collateral, lenders view them as a riskier investment. For this reason, they tend to charge higher interest rates. Overall, personal loans often have higher interest rates than secured loans like home equity loans and home equity lines of credit (HELOCs), as well as small-business loans and other types of loans.

Con: Taking on More Debt

A loan is a loan. Even if you take out a personal loan to consolidate debt, you're still borrowing money that you'll have to pay back with interest. Plus, if you use personal loans to pay off credit card debt, you'll need to make sure you don't start charging to your card again before you've paid off your personal loan. If the want can wait, save up the cash.

Con: Credit Consequences

Applying for a personal loan requires a hard inquiry, which may impact your credit score for a year and possibly stay on your credit report for two years — but it's part of the process when applying for most loans. Making late loan payments or missing payments will also most likely lower your credit score.

If remembering due dates isn't your strong point, try setting up automatic bill pay. (Using a mobile app will amplify the convenience.) Once you sign up and make sure you have enough money in your account for your payments, your due-date woes will be out of sight, out of mind, and your payments will be on time.

Con: Predictable Monthly Payments

If you prefer to tailor your monthly payment amount as you go (as long as it meets the required minimum) and have an unlimited payoff period, like payments toward a credit card bill, you might not appreciate a fixed payment schedule.

Some Final Thoughts

Assessing your financial situation before taking out a personal loan is important as well. Before you borrow, you may also want to consider the following:

  • Are you in a place where you can afford loan payments? Look at your monthly budget and make sure you're not stretching yourself too thin.
  • Think about your timeline — if you can wait at all to spend the money, consider saving the same amount each month that your personal loan payment would have been until you have enough to cover your big expense. The hit to your budget will be the same, but saving ahead helps you avoid loan interest, and depending on your savings account, you might even earn dividends in the meantime!
  • Do you have a strong enough credit score to qualify for a competitive interest rate? If not, consider ways to raise it even a little bit before applying for your loan.

Now that you know what you're getting with a personal loan, go ahead and shop around, do some research, and assess your needs vs. wants. That bathroom remodel or the vacation of your dreams might just be within reach.

Explore Personal Loan Options

Explore the diverse offering of products, services, and support available to our members.