Should I Get a Personal Loan?

Earlier this year, TransUnion found that 23.9 million Americans have an unsecured personal loan; that's about 7% of the U.S. population. But was a personal loan really the right move for all 24 million of these consumers? Probably not.

So how do you know when a personal loan is the right choice and when it's better to explore other options? Below, we'll break down not only the pros and cons of personal loans, but also when you should — and shouldn't — get one.

What is a personal loan?

A personal loan is a lump sum of money you borrow, then repay with interest over a set number of years. Personal loans are typically unsecured (no collateral), and you can use them for (almost) anything. Common uses for personal loans include:

• Debt consolidation
• Home renovations and repairs
• Medical bills
• Moving costs
• Emergency expenses, such as car repairs and vet bills

When choosing a personal loan, you'll want to consider three key factors: annual percentage rates (APRs), loan repayment terms, and loan amounts (how much you can borrow). These factors can vary depending on your credit history, market conditions, and the lender you select.

• Personal loan interest rates are typically expressed as an APR and can range from 6% to 36%.
• Loan terms commonly run between two and seven years (repayment terms may be longer for some loan purposes, like home improvement).
• Some lenders let you borrow as little as $1,000 or as much as $200,000.

Learn More: How Do Personal Loans Work?

Compare: APR vs. Interest Rate on a Personal Loan

Benefits of personal loans

When considering the pros and cons of personal loans, it helps to have a frame of reference. For instance, a personal loan compared to a home equity loan may have different advantages and disadvantages relative to a credit card.

But generally speaking, the best personal loans offer a number of advantages, including:

• Fast funding: Many lenders advertise same- or next-day funding for personal loans. Some others may take a few business days, but even so, personal loans hit your bank account fast. This is ideal in emergency scenarios where you need money ASAP.
• Lower interest rates: While personal loan rates may look high compared to auto loan and mortgage rates, they’re typically lower than a credit card’s APR. That often makes a personal loan a better choice than a credit card, particularly for a larger bill you can’t pay off in a month.
• Flexible use cases: Aside from a few exceptions — including starting a business, paying for college, and making a down payment on a house — you can use a personal loan for almost anything.
• Potential to improve credit: When you manage a personal loan responsibly, you’re impacting multiple credit score factors. Regular on-time payments can boost your credit score over time, and a personal loan also diversifies your credit mix. And if you use a personal loan to consolidate credit card debt, your credit utilization on those cards will drop to 0% — another great boon to your credit score.
• No collateral required: Most personal loans are unsecured; that is, you don’t have to put up collateral to get approved. Other loans, such as mortgages and car loans, use your property as collateral, meaning your home and car could be at risk of foreclosure and repossession, respectively, if you default.
• Simple interest: Unlike credit cards, personal loans charge simple interest. That means you won’t have to worry about being charged interest on unpaid interest. 
• Longer repayment terms: If you’re comparing a personal loan to a BNPL loan, payday alternative loan, or cash advance app, personal loans have longer repayment terms that can translate into lower monthly payments.

Related: Long-Term Personal Loans: What To Know

Drawbacks of personal loans

As with any kind of loan, personal loans have some disadvantages to consider before applying. 

• Immediate credit score impact: Applying for a personal loan typically results in a hard inquiry on your credit report. Hard inquiries lead to a drop in your credit score. Though small (less than five points) and temporary (one year), you shouldn’t take any negative credit impact lightly.
• Monthly budget constraints: Personal loans require a monthly payment until you’ve repaid the loan (plus interest) in full. You’ll need to make room in your budget to ensure you can keep up with that monthly payment, which could mean cutting other expenses or finding an additional source of income.
• Higher interest rates: Compared to alternatives like home equity loans, home equity lines of credit (HELOCs), and 0% APR credit cards, personal loans have higher APRs.
• Fees: Some personal loans may charge origination fees, which can run anywhere from 1% to 12%, depending on the lender and your credit profile. Other fees you may encounter include late payment fees and NSF fees.
• Shorter repayment terms: If you’re comparing a personal loan to a home equity loan or a HELOC, the repayment term is much shorter. The repayment term for personal loans can also feel inflexible when compared with credit cards, a common alternative to personal loans for small emergencies; as long as you make the minimum monthly payment, there’s no hard end date you need to strive for.
• Temptation: If you use a personal loan to consolidate credit card debt, you’ll need to resist the urge to start spending with those credit cards again, “or you could end up piling on more debt,” advises Uziel Gomez, Certified Financial Planner and founder at Primeros Financial. If you don’t have a good relationship with credit, Gomez recommends “sticking with disciplined repayment strategies,” like the debt snowball or debt avalanche method.

When is a personal loan a good idea?

You might get a personal loan if you:

• Need money fast.
• Have a decent credit score and can qualify for a relatively low interest rate.
• Have room in your budget to handle the monthly payment.
• Have explored other non-debt options and are still coming up short.

Here are some scenarios when a personal loan makes sense:

You want to consolidate high-interest debt

Juggling multiple debts can be tough. Having various bill due dates throughout the month makes it easy to let one fall through the cracks. And if those debts are credit cards, they have the potential to rack up interest and late fees fast.

A solution? You can take out a debt consolidation loan and use the proceeds to pay off your other debts. Now, you’ll only have to keep track of a single monthly loan payment, ideally with a lower interest rate.

When you need to make home improvements

Being a homeowner is expensive. For instance, when appliances and systems break down, you’re on the hook for costly repairs. A home improvement loan can help with the cost.

You can also use a home improvement loan to remodel your home. While expensive, doing so could boost your property value and earn you more money when you eventually sell your home.

A caveat regarding personal loans for home improvement

Personal loans aren’t your only option for home improvement. What makes them most appealing is the fast funding, but those interest rates can cost you in the long run. 

Chad Gammon, Certified Financial Planner and owner at Custom Fit Financial, always asks his clients to consider two alternatives — home equity loans and home equity lines of credit (HELOC) — which take longer to fund but offer better rates.

“HELOCs have a [lower] variable rate that’s better than a personal loan, and they’re good for flexibility,” such as ongoing home improvements over time, Gammon says. And a home equity loan “is good for a larger, single renovation” and “typically has the lowest interest rate” of all three options (home equity loan, HELOC, and personal loan). 

When you can’t cover unexpected expenses on your own

If you’ve explored all the logical options to pay what you owe — and still can’t come up with the money — you may have no other choice than to take out a personal loan. 

While a personal loan can be expensive, depending on your credit, they’re a far safer and more affordable option than predatory payday loans. And they offer longer repayment terms than other quick cash options like cash advance apps, BNPL loans, and credit cards.

When you’re in an unhealthy environment

Finally, you might need to consider a personal loan if you’re in a place that is physically or emotionally unsafe and you need money to get out.

“A personal loan could be a viable option for someone living in an unhealthy environment who needs financial support to relocate to a safer place,” says Gomez. This could include leaving an abusive relationship or moving out of an apartment in an unsafe area or that has unsafe living conditions your landlord refuses to address.

When is a personal loan not a smart idea?

A personal loan isn’t always the right choice. Don’t take out a personal loan if:

• You have time to come up with the cash.
• You don’t need the money.
• You’re on a tight budget and won’t comfortably be able to afford the monthly payment.
• You haven’t yet explored other options.

Here are some scenarios when a personal loan doesn’t make sense:

When you could pay off the bill in under a month

If you don’t have the cash on hand to tackle a big expense but you will by your next pay day, you may not need to take out a personal loan. 

Assuming the proprietor accepts credit card payments (and you have a credit card with a high enough limit), you could instead pay the bill with your credit card and take advantage of 0% interest during the card’s grace period.

Just make sure you pay off the credit card as soon as your paycheck hits, or else you’ll carry that balance over to the next month and could pay exorbitant interest on it.

When the expense isn’t necessary

If you don’t have to take out a personal loan, don’t. That means you generally shouldn’t take out a loan to buy Christmas presents, pay for a wedding, or fund a vacation.

Instead, focus on saving up for these discretionary expenses. Each month, deposit the money you would otherwise be spending on monthly loan payments into a high-yield savings account or CD with a maturity date that corresponds to when you need the funds.

You can get better financing options elsewhere

This may seem obvious, but it’s worth repeating. You should only consider a personal loan if you’ve exhausted other, often  better options:

• Emergency fund: If you’re facing an emergency and have emergency savings, use it — that’s what it’s there for. Even if you have savings earmarked for something else, like a vacation or down payment on a house, you should spend it on emergency expenses rather than take on new debt. But you may want to think twice before completely depleting your emergency fund.
• Family loans: Borrowing from friends and family can be a touchy subject, and for many, it’s a non-starter. But if you are in a tough spot and believe a loved one would be willing to help, it’s worth asking. Just make sure you prioritize repaying them promptly, and if they say no, thank them for their time and move onto another option.
• Payment plan: Some expenses, like furniture and appliances, may cost more than you have in your savings, but you may not need a personal loan to purchase them. Often, stores offer 0% financing; as long as you pay off the item before the end of the promotional period, you won’t pay any interest. Similarly, doctors and hospitals are often willing to work out a payment plan for high medical bills. 

Personal loan interest rates

Personal loan interest rates depend on several factors, including current market conditions, your credit history, and the lender you choose. The rates below represent current Credible data for three- and five-year personal loans:

Compare Personal Loan Rates

Read More:

• What Are the Requirements for a Personal Loan?
• How To Compare Personal Loans
• How To Get a Low-Interest Loan
• Personal Loan vs. Home Equity Loan
• HELOC vs. Personal Loan
• Best Personal Loans for Bad Credit
• Best Personal Loans for Fair Credit
• Best Personal Loans for Good Credit