Personal loans offer quick cash, flexible use, and no collateral requirements, but they can carry high fees, affect your debt-to-income ratio, and encourage impulse spending. They’re a good idea if you need fast, unsecured funding at a lower rate than credit cards, but a bad idea if the repayment strains your budget or better alternatives exist.
Table of Contents
- Pro: Quick access to cash
- Pro: Flexible use of funds
- Pro: Fixed interest rates
- Pro: No collateral required
- Pro: Lower rates with good credit
- Pro: Simple application process
- Con: Potential for high fees
- Con: Limited options for poor credit
- Con: Impact on DTI and credit score
- Con: Risk of impulse spending
- Con: Repayment period may be short
- Con: Possibility of prepayment penalties
Pro: Quick access to cash
Personal loans are known for fast approval and funding, making them useful in emergencies. But if your need isn’t urgent, alternatives like a home equity line of credit (HELOC) or savings may be cheaper.
Pro: Flexible use of funds
Unlike mortgages or auto loans, personal loans can be used for anything from consolidating debt to covering medical bills. This flexibility is valuable but can also lead to misuse.
Pro: Fixed interest rates
Most personal loans have fixed rates, which keeps payments predictable. This stability is ideal if you’re on a tight budget and want to avoid fluctuating payments.
Pro: No collateral required
As unsecured loans, personal loans don’t require you to pledge your house or car. However, this means rates are higher than those of secured loans like HELOCs.
Pro: Lower rates with good credit
Borrowers with strong credit often get better rates than with credit cards, making personal loans a cost-effective way to consolidate high-interest debt.
Make sure the payments fit your budget and still allow room for discretionary spending and saving. If the loan tightens your budget too much, consider applying for a lower amount or waiting until interest rates drop. Federal Reserve rate cuts are possible (even likely according to some) in 2025 but aren’t guaranteed. If you can wait, monitor rates closely, and apply when you can lock in a more favorable one that supports your broader financial goals.
Pro: Simple application process
Applying for a personal loan is often quick and 100% online, with approval in minutes to days. However, compare fees and terms before rushing into an application.
Con: Potential for high fees
Many personal loans charge origination or late fees, increasing the overall cost. Always check the fee structure, and consider no-fee loans if available.
Con: Limited options for poor credit
If your credit score is low, you may only qualify for high-interest personal loans—or none at all. Alternatives like secured loans or credit builder products may be better options in these cases.
Con: Impact on DTI and credit score
Taking a personal loan raises your debt load, affecting your DTI and potentially your credit score. High DTI can hurt your chances for other loans, so assess carefully before borrowing.
Con: Risk of impulse spending
Because personal loans are easy to get and flexible, they can encourage unnecessary spending. Use them strategically for needs, not wants, to avoid future debt stress.
Con: Repayment period may be short
Short loan terms reduce total interest but increase monthly payments, which can strain your budget. If you’re worried about cash flow, compare longer-term options or secured loans instead.
Con: Possibility of prepayment penalties
Some lenders charge fees if you pay off your loan early, wiping out potential interest savings. Always read the fine print and choose loans without prepayment penalties when possible.
If you’ve weighed these pros and cons and think a personal loan might be right for you, take the time to compare lenders before applying. We’ve reviewed top-rated options to help you find the best rates, terms, and features for your financial needs:
Check out our full guide to the best personal loans to read more about these lenders and several others.
About our contributors
-
Written by Megan Hanna, CFE, MBA, DBADr. Megan Hanna is a finance writer with more than 20 years of experience in finance, accounting, and banking. She spent 13 years in commercial banking in roles of increasing responsibility related to lending. She also teaches college classes about finance and accounting.
-
Reviewed by Erin Kinkade, CFP®Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families.