Personal loans can be a great tool to help streamline your budget and earn money quickly in emergencies. From debt settlement to paying large auto repair bills, you can usually qualify with a good credit score and a stable income. Many lenders provide same-day funding, providing quick access to funds. Additionally, the average fee is usually lower than other forms of debt, such as credit cards, which could save hundreds, if not thousands, of interest fees.
However, like all financial products, personal loans have their own drawbacks. Some lenders charge high fees and if they only qualify for a short repayment period, monthly payments can be sharp. Before you take it out, it’s worth weighing the pros against the weaknesses to determine whether a personal loan is the right financing option for you.
Benefits of personal loans
Below are some of the benefits of using personal loans over other types of loans. Knowing them will help you determine if this type of financing is best for your borrowing needs.
One lump sum payment
Getting the entire loan at once can make everything from major home renovation projects to major life events like weddings. The amount is repaid in installments at a fixed rate, so there is a predictable monthly payment that does not change over the life of the loan.
This gives you much more stability than your credit card rate, but this often fluctuates. Additionally, since you cannot reuse your credit when you repay your credit, there is no risk of carrying your balance as you have with your credit card.
Fast funding time
Many personal loan companies provide quick approvals and timelines for funding, providing access to funds typically within one business day. This can help in emergencies and other situations where you need money right away. Some lenders can deposit their loan proceeds in their bank account on the day they apply if they are eligible.
There are no collateral requirements
Personal loans are not secured, so you don’t need collateral like a car or home to be approved. If you can’t pay off your loan, your credit score can be damaged, but you don’t have the risk of losing your transport or shelter from bank seizures or foreclosures.
Lenders usually approve you based on proof of stable employment, regular revenue and proof of your credit score. The process is often faster than a secured loan, as lenders don’t have to assess the value of the collateral to lend you money.
Low interest rates
Personal loans often have lower interest rates than credit cards. As of June 2025, the average personal loan rate was 12.65%, and the average credit card rate was 20.12%. Borrowers with excellent credit qualify for the lowest rate offered by the lender, and are under 10%.
Flexibility and versatility
Personal loans can be used for many purposes, such as paying for home improvements, purchasing expensive vehicles such as boats and recreational vehicles, or integrating multiple debts into one manageable payment.
It is not limited to specific uses, such as those using a car loan. This can only be used to purchase a vehicle. Some lenders offer the highest priced at $100,000, offering far more power borrowed than most credit card companies allow.
Fixed Fees and Payment Schedule
Unlike a credit card, you can know exactly how much you pay each month, the interest you pay, and how many months or years it will take to repay it. The rate is fixed, leaving it the same, reducing the stress you may encounter when carrying a variable-price credit card balance.
It also allows you to pay off your loan on the condition for seven years, providing a breathing room on your budget. However, most personal loans allow you to pay your balance early without penalty if necessary. Remember: the longer the loan term, the more interest you can pay over the life of the loan.
You can increase your credit score
Many people use personal loans to consolidate their debts, particularly spinning their debts like credit cards. The reason is simple. Paying back your credit card is a great way to improve your credit usage, which plays a major role in how high or low your credit score is.
Additionally, replacing it with a single fixed-rate personal loan payment reduces the risk of late payments trying to manage several variable-rate credit card payments each month.
Cons of personal loans
Personal loans are not a financial move that is suitable for any situation. Learn the disadvantages so that you don’t get over your head with regular fixed payments that can’t be processed.
Interest rates may be higher than home equity alternatives
If you own a home, we recommend comparing your Home Equity Loan or Home Equity Line of Credit (HELOC), especially if your credit score is fair or good. This is especially true for inadequate credit borrowers who may see a 30% north fee, which is higher than most credit cards.
There is no flexibility in paying
Once you select the amount and repayment period of your loan, you will be locked into that payment until the repayment period ends. If payments are different (tip income or self-employed), it is recommended to stick to your credit card as payments are based solely on what you use and there is a minimum payment option.
If you don’t need all the funds at once, we recommend checking out your personal or home equity credit line. You can use your funds as needed, pay off your balance, and reuse your credit line if necessary.
Fees and penalties may be high
Origination fees for personal loan lenders range from 1% to 12% of the loan amount. The fee is usually deducted from the amount paid to the borrower.
Although rare, some lenders will charge a prepayment fine if they repay the balance before the end of the loan term. Before applying, please check all fees and penalties for the personal loan you are considering.
Shorter repayment terms than other options
One drawback of personal and home equity loans is that they generally close out after seven years. You can choose your terms for 30 years with a Home Equity Loan, HELOC, or cash-out refinance. This will give you a much lower monthly payment.
Additionally, there is a tax benefit to using a home equity loan instead of a personal loan if the funds are specifically for upgrades or renovations to your home. Interest on mortgages used for renovations may be tax-deductible, but this is not the case when you take a personal loan to improve your home.
Increase in debt load
Many lenders have a maximum payment period of five years, which can result in monthly payments, resulting in a significant increase in the debt-to-income (DTI) ratio. Lenders measure the DTI ratio by dividing total liabilities by pre-tax income. A high DTI ratio can make it difficult to borrow money in the future.
Consolidating credit card debts using your personal loan repeatedly can indicate that you are too dependent on credit use. If you’re not paying attention, you may want to earn more debt after paying off your debt settlement loan instead of focusing on repayment.
Taking away your personal loans will help you consolidate your high-profit debt. You can also draw in debt if you don’t deal with bad money habits like spending without a budget, enough savings and spending like impulsive spending.
You cannot reuse your credits as they will be rewarded
With a personal loan, you will need to receive all your money at once and pay with the full balance. Credit cards allow you to use approved credits as needed and reuse them in the future.
Even if you don’t need all your personal loan money right away, you’ll immediately start paying on your entire balance. Credit card payments, on the other hand, are based solely on the amount of bills, not on the entire credit limit.
Potential credit loss
When you apply for a loan, the lender will perform a hard credit inquiry and lower your score a few points. However, the initial dip will not last long and short term DIP by enquiry can be more than offset by a decline in credit utilization, especially if you are paying off a mountain of credit card debt.
Remember: The turnover of the debt you owe accounts for 30% of your FICO score, so consolidating and controlling your debt in future credit card usage can lead to a significant increase in your score.
Do I need to get a personal loan?
Personal loans are an attractive option, especially if you need quick cash.
When a personal loan is right for you
Once you’ve looked into the available options and potential fees, here’s how you can identify whether a personal loan makes sense for your situation.
- You have a strong credit score: the lowest interest rate is reserved for borrowers who have good credit.
- You pay a stable salary: A personal loan only makes sense if you have a regular salary and is sufficient to comfortably pay for your chosen term.
- You want to pay off high profit debt: Personal loans are a good way to consolidate and pay off expensive credit card debt.
- Use the funds for the required costs. Other good reasons to use personal loans include paying emergency fees and remodeling your home.
Time to find alternatives
Personal loans are one of many ways to get cash. Personal loan alternatives may be more suitable in some circumstances.
- You have an overexpense habit: Paying back your credit card on a personal loan may not make sense if you start building your new credit card balance right away.
- You cannot afford to buy monthly payments: Consider your personal loan repayment timeline and monthly payments. Use a loan calculator to determine if you can purchase monthly payments for the period you spend on repayments.
- You don’t need money urgently: It makes sense to build savings for large purchase payments rather than taking out personal loans over the years and paying with interest.
- Your income and employment situation is unstable: Committing to regular monthly payments for the next 2-7 years doesn’t make sense whether your salary or employment is inconsistent. Seasonal workers, committee employees, and self-employed consumers may be better with credit card or credit line flexibility.
Conclusion
Personal loans require money quickly and offer many benefits to borrowers who prefer fixed interest rates and security of payments on the lifespan of the loan. If you have too much credit card debt or want to avoid borrowing on assets like your home, they may be good “cleanup” tools.
However, if you have poor credit, it can be expensive, and if your income is unpredictable, it can quickly become a financial burden.
If you find your personal loan is the best, always compare interest rates and loan terms. Once you’ve read the fine print that includes fees and penalties, you’ll determine whether the benefits of a personal loan outweigh the drawbacks before committing.
