At a Glance

If you need extra cash to pay for an unexpected expense, big project or event, or almost anything else, a personal loan may be right for you. While there are some downsides to a personal loan, there are also several advantages that should be considered. What’s right for you depends on factors like why you need the funds, your credit score and history, income, debt-to-income ratio, and others. Plus, with several alternatives, they aren’t right for everyone.

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Pros and cons of personal loans



There are a few advantages of personal loans, including:

1. Flexibility

Personal loan funds can be used for just about anything, such as:

  • Home renovations
  • Car repairs
  • Paying for a wedding
  • Funding a vacation
  • Debt consolidation
  • Moving expenses
  • Medical bills

Most lenders allow borrowers to use the funds for almost any reason, though some personal loans are designated specifically for certain uses (such as debt consolidation loans). This flexibility makes them a great option for someone needing financing.

Keep in mind that there are a few restrictions, such as personal loan funds can’t be used to further illegal activity, pay for post-secondary education, or purchase real estate. Be sure to carefully read the loan’s fine print for additional information.

2. Easy to manage

Personal loan terms can be easier to manage than credit cards or other types of debt, often because repayment terms can range from 12 to 60 months or more. These repayment schedules are pretty straightforward, only requiring one payment per month for the life of the loan. And, because personal loans have fixed interest rates, the payments will also never change. You’ll be able to easily work the payment into your budget for as long as you have the loan.

3. Competitive rates and higher borrowing limits

Annual percentage rates (APR) for personal loans can range from as low as 2.99% up to 36%. However, borrowers that have great to excellent credit scores, strong credit histories, a stable income, and meet other minimum requirements can qualify for lower rates than other options, such as credit cards.

When it comes to how much you can borrow, some personal loan lenders have borrowing limits up to $100,000. Many personal loan borrowing limits are higher than alternatives, making it easier to get all of the funds you need.

4. No collateral requirement

Most personal loans are unsecured, meaning they do not require collateral to secure the loan. Assets that can be used as collateral for a loan include a car, home, savings account, or investments. Because you don’t need collateral for an unsecured loan, you don’t have to worry about losing your asset(s) if you can’t repay the loan. The primary downside to this is these loans may be more difficult to qualify for or have higher interest rates.

5. Makes it easy to consolidate debt

Personal loans can be used for debt consolidation, and you can even find debt consolidation loans designed specifically for consolidating debt. If you have multiple high-interest debts, you can take out a debt consolidation loan at a lower rate to pay off those debts. Then, you’d make payments to the new loan. Not only can this help you pay off your debt faster, but it can also save you money.

6. Helps borrowers build credit

When you apply for a personal loan, it triggers a hard credit inquiry that temporarily decreases your credit score by a few points. However, as long as you make your monthly payments on time, you can actually build credit and improve your credit score. In fact, payment history accounts for 35% of your FICO credit score, so consistent on time payments can really help build your score and history.

On the other hand, making late or missing payments can decrease your score.

7. Quick funding

The amount of time it takes for an application to be processed and approved and a loan to be funded can vary by lender. Generally, online lenders can approve and fund a loan faster than banks and credit unions. However, some lenders advertise same-day or next-day funding, so you can get the cash faster.

Be sure to research lenders carefully, because approval and funding can depend on a variety of factors including your bank, the size of the loan, and others.


While there are several advantages to personal loans, there are also some disadvantages and risks with taking on additional debt. Here are a few examples:

1. Higher interest rates with poor credit

Personal loans often have competitive interest rates that are lower than alternatives, but if you have bad or no credit, it may be challenging to get approved for a low rate. In fact, rates can be as high as 36% depending on your credit score. In this case, other types of financing (such as home equity loans or 0% APR credit cards) may be a better option.

Not only should you consider all alternatives, but you should also work to improve your credit score in order to get the best interest rates possible.

2. Fees and penalties

Unfortunately, personal loans come with more than interest rates. They also come with fees, such as origination fees, application fees, late payment penalties, or early payoff penalties. While there are ways to avoid most of these additional charges, it’s important to pay attention to fees and penalties a lender may charge and increase the cost of borrowing the loan.

3. Can increase debt

A personal loan is obviously a type of debt, so it’s important to carefully consider your reason for getting a personal loan in order to avoid unnecessary debt. And, if you can’t make payments on time, it can seriously damage your credit score. This can lead to a debt spiral that can be tough to get out of if you aren’t prepared.

4. May require collateral or cosigner

If your credit score could use some improvement, you may not be able to qualify for a loan on your own. You may have to apply for a secured personal loan, which would require collateral, and if you aren’t able to repay the loan, you could lose those assets. Or, you may have to ask someone to be a cosigner on the loan. In this case, the co-signer would need to have excellent credit and a steady income. The downside is if you’re unable to make the payments, your cosigner will be responsible for repaying the debt.

Related: Personal Loans with a Cosigner

Weighing the pros and cons of personal loans

Weighing both the pros and cons of personal loans is critical to ensure you’re making the right financial decision for you:

Pros Cons
  • Can be used for just about anything
  • Fees and penalties
  • Can help you build credit
  • Can impact your credit score
  • May have competitive interest rates
  • High APR for borrowers with poor credit
  • High borrowing limits
  • Collateral may be required depending on borrower
  • Can help with debt consolidation
  • Can increase debt
  • Approval and funding process happens quickly
  • Monthly payments may be high
  • May not require collateral

What is the benefit of obtaining a personal loan?

If you have several high-interest debts you’re interested in consolidating, or simply need extra funds for a project, event, or emergency expense, a personal loan can be an option. Typically, personal loans don’t require collateral or a cosigner, and depending on your credit score, history, income and other factors, usually have competitive interest rates and favorable terms.

Because personal loans can be used for just about anything, and the application and funding process can be quick, many borrowers turn to personal loans for their financial needs. However, keep in mind these loans are still a type of debt and they must be repaid, so it’s important to weigh all your options and consider all the factors carefully.

Learn more: Benefits of Obtaining a Personal Loan

Is a personal loan right for you?

Knowing if a personal loan is right for you depends on your personal situation and needs. Generally, a personal loan may be a good option if:

  • You have a great credit score. The better your credit score, the better interest rate you’ll be covered.
  • You have high-interest debt you want to consolidate. Using a personal loan for debt consolidation can help you pay off your debt faster and save you money in interest.
  • You need extra cash. While a personal loan is debt and applying for one should be carefully considered, the loan funds can be used for just about anything you may need.
  • You need cash fast. Many personal loan lenders have same-day or next-day approval and funding processes.
  • You have a steady income. It’s important to make your monthly loan payments on time. Otherwise, your credit score could suffer, and you risk defaulting on the loan. Make sure you’re able to afford the monthly payments before you apply.
  • Your debt-to-income ratio (DTI) is below 36%. Having too much debt and taking out a new loan can lead to a disastrous debt spiral.

Things to consider before applying for a personal loan

Applying for a personal loan is quick and easy, and while there are some cons to weigh, there are several pros depending on your financial situation and personal needs. It’s important to remember there are several things to consider before applying for a personal loan such as:

  • Assess your financial situation and make sure you can afford the monthly payments. Even if you can, be sure it won’t stretch your budget too far, making other necessities more difficult to afford.
  • If you have time before the funds are needed, consider setting aside a certain amount of money every week or month so you have enough for the expenses without having to take out a loan. This helps you avoid interest and protects your credit score.
  • Your credit score is an important factor, so if it could use some improvement, taking time to do so can help you in the long run. If your score is poor, you may not qualify for the loan at all, or you may only be eligible for high interest rates. A great to excellent credit score is important for the best rates and terms.
  • Do your research and compare lenders and loan options. Not all lenders and loans are created equal, so you’ll want to compare interest rates, loan amounts and terms, fees, application process, funding time, customer service reviews, and more to ensure you’re choosing the right option for you.

How to find the best personal loan lender?

Between banks, credit unions, and online lenders, there are dozens (if not hundreds) of lenders out there that you can choose from. However, not all are created equal and work for everyone. When comparing lenders, consider:

  • Interest rates. Get prequalified with multiple lenders to compare rates more accurately. This does not impact your credit score.
  • Fees. Late payment fees, origination fees, early payment penalties, and other fees can add to the total cost of your loan. Make sure you’re familiar with fees the lender may charge.
  • Customer service ratings and reviews. It’s important to work with a lender who can answer your questions and assist you should you ever need it.
  • Loan amounts. Make sure the lender offers the loan amount that you need.
  • Loan terms. Loan terms can vary, so check that the lender offers loan terms that align with your budget and needs.
  • Minimum requirements. Most lenders have a minimum credit score, income, and other requirements. If you do not meet those requirements, your application will likely be rejected. Make sure you meet all of the minimum requirements before you apply to protect your credit score and your time.

How to manage a personal loan wisely?

If you do determine a personal loan is right for you, it’s important to manage it wisely to protect your credit and your budget. A few tips for doing this include:

  • Add the payments to your budget. Make sure you include this new monthly payment in your budget as a new bill that is not optional to pay. If you must make other adjustments to your budget to ensure you can afford the debt payment, do so right away to avoid missing any payments.
  • Have a repayment strategy. Especially if you have other debts, it’s important to create a plan for paying off your new loan as well. Consider payoff strategies like the debt snowball method (paying off debt in order of smallest to largest) or debt avalanche method (paying off debt with the highest interest first).
  • Make payments on time. Avoid being late to avoid penalty fees and negative impact on your credit score.
  • Make larger payments. If you get a bonus or random influx of dollars, try to put those extra funds toward your debt to pay it off sooner.

Alternatives to a personal loan

Exploring all the alternatives to personal loans can help ensure you’re making the best decision for your finances. A few other options include:

1. Balance transfers

If you’re considering a personal loan for debt consolidation purposes, you can also consider a balance transfer credit card. A balance transfer is when you transfer outstanding credit card balances to one single card, reducing the number of monthly payments you have and interest payments you must make. Some cards even offer a 0% introductory APR period or no annual fees. However, be sure you repay the balance before the introductory period is over or you’ll be hit with high interest.

Related: How to Transfer Credit Card Balance

2. Credit cards

Depending on the reason you need personal loan funds, a credit card may be a good alternative for a few reasons:

  • If you apply for a 0% introductory APR credit card, you won’t owe interest on the card until that period is over. Typically, the introductory period ranges from 12 – 24 months. You can carry a balance on the card without accruing interest each month. But, it’s critical to pay off the balance before the intro period is over.
  • If you apply for a cash back rewards credit card, you can earn cash back on every dollar you spend.
  • Paying off a credit card balance on time and in full each month can help build your credit.

However, if your financial needs are greater than your credit card limit, or you wouldn’t be able to pay off the balance in full, this may not be a great option.

3. Home equity loans

If you own your home, a home equity loan (HEL) acts like a second mortgage in that it allows you to borrow against the value (equity) in your home. This is given to you in a lump sum of money, and your home is used as collateral. You then repay the loan in fixed monthly payments.

While these predictable monthly payments and fixed rates are advantages, you could lose your home if you fall behind on payments, there are closing costs and fees, and it’s essentially another mortgage to pay.

Related: How Does a Home Equity Loan Work?


The steps to getting a personal loan include:

  1. Check your credit score and credit history/reports.
  2. Consider the different types of loans available (such as secured vs. unsecured) and choose your loan type.
  3. Shop around for the best rates and compare lenders.
  4. Fill out the loan application.
  5. Accept the loan and receive the funds.
  6. Start making payments.

Read more: How to apply for a personal loan | Credello

Even if you have bad credit, you still may be able to qualify for a loan. A bad credit personal loan is a personal loan designed for someone with bad credit, and these can include secured loans, loans with cosigners, or others. Keep in mind that a poor credit score likely means your loan’s interest rate will be high, and you may have to shop around more to find a lender who will accept your application.

Read more: Personal Loans for Bad Credit

“Income” is classified by the IRS as money you earn through work or investments. Because a personal loan is a type of debt that must be repaid, it cannot be classified as income (unless your debt is forgiven).

The IRS typically doesn’t consider personal loans as taxable because they do not count as income. The only reason you’d have to declare your personal loan is if you had a loan canceled, as that income may count as taxable. Or, if you used any part of a loan on business expenses, you may be able to deduct that portion of the interest.