Pros and Cons of Personal Loans

Pros of personal loans

When used responsibly, personal loans can be valuable financial tools in a variety of situations, said Andrew Harris of Jenius Bank. For example, installment loans can be utilized for home renovations, large purchases or life celebrations like a wedding or a dream vacation.

Personal loans can also be an excellent tool for debt consolidation since you can lock in a single, consistent loan payment instead of making several payments across multiple debts.

Not only that, but personal loans let you pay the same interest rate and same monthly payment for the life of the loan (often up to seven years or longer), whereas balance transfer credit cards that offer a 0% annual percentage rate (APR) only do so for up to 21 months before reverting your account back to the high variable rates they normally charge.

With these details in mind, here are some of the main advantages of personal loans over other types of loans:

• Wide range of loan amounts: Depending on the lender, you may be able to borrow as little as $1,500 or up to $100,000. This broad range makes it easy to access the exact amount of money you need.
• Online preapproval: Many personal lenders let you "check your rate" and gauge your approval odds before you apply. This can help you see the rates and terms you may be offered without a hard inquiry on your credit report.
• Fixed interest rates: Personal loans typically have fixed rather than variable interest rates that fluctuate with the market.
• Lower rates than credit cards: The Federal Reserve reports that the average credit card interest rate was 21.39% as of August 2025, compared to 11.14% for 24-month personal loans.
• Fixed monthly payments: Because interest rates are fixed and personal loans come with a set repayment schedule, monthly payments are predictable and stay the same until the loan is paid off.
• Flexibility: You can use a personal loan for nearly any purpose, whether you want to finance a wedding or a vacation, or you need to consolidate and pay down high-interest debt. Personal loans are also commonly used for home renovations, medical expenses, adoption fees, costs for IVF fertility treatment and more.
• No collateral requirement: While home equity loans and home equity lines of credit (HELOCs) require you to use the value of your home as collateral, most personal loans do not have any collateral requirements.

Cons of personal loans

There are some notable downsides to personal loans, as well as plenty of reasons to consider other financial products. The unfortunate truth is that personal loans add to your debt load, and more debt can lead to financial consequences and even hardship down the line.

You’re also subject to a big credit score ding if you fail to make your payments. And unlike credit cards, you can’t just pay the minimum; you’ll have to budget for the full amount every month for the life of the loan.

The main disadvantages of personal loans can vary from person to person, but may include:

• Consequences of late payments: While personal loans can help build credit, the opposite is also true. Not only will late payments on a loan negatively impact your credit score, but fees and penalties can add up quickly if you’re not making your monthly payments.
• No payment flexibility: While credit cards let you make only a minimum required payment if you need to, personal loans require the same set monthly payment throughout the life of the loan.
• Origination fees and penalties: Many personal loans charge origination fees that can be as high as 10% of the loan amount. Also, watch out for other hidden fees, such as prepayment penalties.
• Potential for high interest rates: While personal loans for excellent credit can offer exceptionally low rates and great terms, the same cannot be said for those with fair credit or bad credit. In fact, some personal loans have fixed interest rates as high as 35.99%.
• Strict eligibility requirements: Personal loans can sometimes have stricter eligibility requirements than other financial products, ​​meaning those with poor credit or a short financial history may not qualify.

» MORE: Personal loan myths

Pros and cons of long-term personal loans

Many personal loans offer repayment terms that last up to 60 or 84 months, but there are also long-term personal loans that let you pay down debt for up to 144 months. This means you could borrow money for a full kitchen remodel, a new backyard pool, wedding expenses and more, then pay down the amount you owe over 12 full years.

However, depending on the lender, long-term loans may be offered for some purposes and not others. For example, LightStream lets borrowers repay amounts borrowed over up to 144 months if they're getting a loan for home improvements or a boat or RV, yet their debt consolidation loans and wedding loans are only offered in terms of up to 84 months.

While long-term personal loans can offer the financing you need, there are special considerations that come into play when you agree to a repayment term that lasts 10 years or longer.

Pros and cons of secured personal loans

Though most personal loans are unsecured, meaning they don’t require collateral, secured personal loans are available for those willing to borrow against their assets.

Secured personal loans require you to pledge collateral such as a car, savings account or other asset in exchange for borrowing money. Because the lender has something to claim if you default, these loans often come with lower rates and higher approval odds than unsecured personal loans. Still, the added risk to your assets means they aren’t right for everyone.

Pros and cons of personal loan alternatives

If a personal loan isn’t the right fit, several other borrowing options may offer lower costs or more flexibility depending on your situation. Here are the most common alternatives, plus their benefits and drawbacks.

0% APR credit cards

A 0% APR credit card offers an introductory period where you won’t pay interest on new purchases or balance transfers. This can make short-term borrowing significantly cheaper than taking out a personal loan, but only if you can repay the balance before the promo window ends.

Home equity line of credit (HELOC)

A HELOC lets homeowners borrow against the equity in their property and draw funds as needed, similar to a credit card with a much lower rate. Because your home secures the credit line, lenders typically offer more favorable terms, but there’s also greater risk if you fall behind.

Personal line of credit

Personal lines of credit function like revolving credit accounts that you can use, repay and reuse. They offer more flexibility than a one-time personal loan, though rates may be higher and qualification can be tougher.

Borrowing from family or friends

Informal borrowing can be one of the cheapest ways to cover a short-term need, especially if you agree on repayment terms upfront. Still, it’s important to treat it like a real loan to avoid misunderstandings or tension later.

Should you get a personal loan?

Whether you should get a personal loan depends on how much money you need, your credit rating and the purpose of your loan.

For example, while a personal loan for someone with excellent credit can come with low interest rates and fair repayment terms, a personal loan for someone with bad credit tends to charge exorbitant rates and high fees. If your credit score is in the lower range and you have the option to wait it out, you may want to skip borrowing right now and work on improving your credit score first.

The purpose of a personal loan can also affect the amount offered and the interest rate. Lenders will ask what the money is for or how you plan to use it during the loan application process. That’s why it’s best to only take out a personal loan if you have a specific plan for how you’ll spend — and repay — the funds.

“The important thing is borrowing responsibly: not borrowing more than you need and making payments on time,” said Harris.

» GET STARTED: How to apply for a personal loan in 5 steps

When not to use a personal loan

Personal loans can be helpful, but they aren’t the right solution for every situation. Avoid taking one out when it could increase your financial risk or create unnecessary debt. Avoid personal loans when:

• You’re financing nonessential spending: Vacations, luxury items and other wants are better paid for in cash or saved for over time.
• Your income is unstable: Freelancers, gig workers or anyone with inconsistent earnings may struggle with fixed monthly payments.
• Your budget is already tight: If you’re barely covering essentials now, adding a new loan payment can increase the risk of missed payments or default.
• You have high-interest debt you can’t manage: A personal loan may not fix underlying budget issues and could worsen the problem.

Here’s what you can do instead of getting a personal loan:

• Build a dedicated savings fund for discretionary purchases.
• Address budget gaps before borrowing, such as reducing expenses or increasing income.
• Consider lower-risk options, such as 0% APR credit cards for short-term needs or talking with creditors about hardship programs.

How to qualify for a personal loan

Qualifying for a personal loan is easier when you know exactly what lenders look for. Following a clear set of steps can help you improve your chances of approval and secure better terms. Here’s how to qualify:

1. Check your credit score: Review your reports for errors and understand how your score affects rates and eligibility.
2. Confirm your income and debt levels: Lenders want proof you can handle the monthly payment, so gather pay stubs, tax returns or bank statements.
3. Compare lenders: Look at banks, credit unions and online lenders to find the best rates, fees and repayment terms for your profile.
4. Get prequalified: Many lenders offer soft credit checks that estimate your rate without affecting your score.
5. Prepare documentation: Have identification, employment information and financial records ready to speed up approval.
6. Review the fine print: Understand all fees, including origination charges, late fees and prepayment penalties, before you sign.

Choosing the right lender

When looking to take out a personal loan, Harris says the best lenders will be more than happy to walk you through the qualification process. You can borrow money from a traditional bank or credit union near your home, or seek an online lender that offers phone support and online chat.

No matter which you choose, having access to a person you can reach out to with questions is crucial when you're planning to borrow money and enter a repayment agreement that could last several months or years.

“Asking questions is an essential part of the loan process, and you want to make sure the people on the other side of the phone, or screen, are ready and eager to help if you have questions or run into issues during the loan process,” said Harris.

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