Are personal loans worth it?

Pros of personal loans

Most banks and lenders offer an online application process for a personal loan, making the process of obtaining one quick and simple. As long as you’re able to repay it, taking out a personal loan has many advantages, such as:

• Fixed monthly payments
• Consistent repayment terms
• Range of borrowing amounts, sometimes up to $100,000 or higher
• You can use the funds for a variety of purposes 
• Generally, no collateral

Cons of personal loans

Despite the many potential advantages of using a personal loan, there are some drawbacks you should be aware of. These disadvantages can make it difficult to qualify for other financial products in the future, so you want to ensure you’re getting a personal loan for the right reason.

Here’s what to know before taking out a loan:

• Applying temporarily dings credit score
• High interest rates if you have bad credit
• Fees and penalties may apply
• Loan accumulates interest
• You may borrow more than you need
• Risk of default
• Can increase debt-to-income ratio

» COMPARE: Top personal loan companies

When to consider a personal loan

So should you get a personal loan? It can be a helpful solution in several situations, but it’s important to ensure you can repay the loan to avoid damaging your finances.

Common uses include debt consolidation and large purchases like landscaping or home improvements, says Casey Perkins, senior vice president of consumer lending at Ent Credit Union. Here’s when you might consider a personal loan:

• Debt consolidation: If you have lots of different debts with multiple payments, consolidating them into one loan with one monthly payment can be helpful. You’ll have the benefit of keeping track of only one due date instead of many, and you can potentially save money on interest.
• Large, one-time purchase: If you’d like to make a one-time purchase that’s more than you can afford in one payment, you can use a personal loan. For home improvement projects or moving expenses, a personal loan might be the best option.
• Emergency expenses: Life happens, and when it does, a personal loan can cover you financially. Of course, an emergency fund is the ideal scenario for paying for unexpected situations, but a personal loan can be a safety net.

When to avoid a personal loan

A personal loan can help bridge the gap when you need a financial boost that you can pay back over time. But taking out a personal loan can actually make things worse for you financially in a few situations. Here’s when you should avoid taking out a personal loan if possible:

• You have poor credit: Today, there are more and more options for loans for bad credit. But that doesn’t mean that taking one out is the best financial decision. If you apply for a personal loan with a low credit score, you’ll face high interest rates and unfavorable loan terms that could plunge you even deeper into debt.
• You don’t have a sound repayment plan: If you take out a personal loan, regardless of the amount, it’s important to first consider whether your current financial situation will allow you to repay the loan with monthly payments. If there’s no room in your budget, you might need to consider ways to boost your income or stretch your money, rather than taking out a loan you’ll struggle to pay back.
• To fund nonessential purchases: It may not make sense to use a personal loan to make nonessential purchases, like for hobbies, vacations or new tech. Over time, you could find yourself in over your head. Instead, try to save up for luxuries or impulse purchases in order to pay for them outright.

» LEARN MORE: Average personal loan interest rates

Alternatives to personal loans

Perhaps you don’t want to take out a personal loan, or you’re not able to qualify for a loan that suits your needs. In this case, says Perkins, consider alternatives like credit cards, home equity loans or using what you have in savings. “For credit cards, consider a rewards card and pay off the balance monthly,” he suggests. For an added bonus, look for a credit card with a long 0% APR offer so you can finance your purchase without interest for a limited time.

Be aware that loan products like a home equity loan or line of credit may function similarly to a personal loan, but they require collateral. Often, this means your home could be on the line if you default on your loan. A major benefit of a personal loan is the lack of required collateral.

A buy now, pay later (BNPL) financing offer is another alternative you could consider. This option covers your purchases online, and you pay back the amount in fixed, monthly payments. They’re easily accessible and typically don’t have interest rates. But look for any hidden fees or potential impact on your credit score. Also be wary of overusing them and putting yourself in debt for impulse shopping or unnecessary purchases.

“Other products like credit cards may have higher interest charges and fees,” Perkins says. “Alternative financing like online lenders or buy now pay later loans may lead to overspending and accumulating unnecessary debt, which could cause late payments, fees and damage to your credit score.”