Whether you’re thinking of consolidating high-interest credit card debt or looking for some extra cash to provide you with more budget flexibility, you may be investigating your various loan options. 

For many, a personal loan can provide this flexibility while giving you a lower interest rate than credit card companies, payday lenders, or others. But, before filling out that application, think about the pros and cons of personal loans. 

Benefits of Personal Loans

Some benefits of personal loans may depend on your credit profile. If you have a high credit score, higher-than-average income, or a low debt-to-income ratio, you’ll qualify for a more favorable interest rate and loan terms than someone with a poor credit score or low income. They are called personal loans for a reason!


Personal loans are among the most flexible loan options. If you qualify for one of these loans, you can choose the amount of the loan, the loan term, and the monthly due date. This lets you fit the loan repayment into your budget on your terms.

Even better, you can use the proceeds of this loan for just about anything you want. If you take out an auto loan, you need to use it to purchase a vehicle; a mortgage needs to be used to buy a house. But with a personal loan, you can pay off medical bills, take a vacation, remodel your kitchen, or even invest in the stock market—as long as you repay the loan on time, the lender doesn’t care how the funds are used.

Competitive Interest Rates and No Collateral Requirement

Personal loans usually carry lower interest rates than credit cards and almost always have lower interest rates than payday loans. Depending on your income, you’ll also be able to borrow higher amounts than would be available on one credit card. Having just one monthly payment instead of trying to juggle multiple payments (and due dates) for the same overall debt amount can make things much simpler.

Because personal loans are unsecured loans, they also don’t require you to put up any collateral. This means that if you are unable to pay the loan for whatever reason, your home or vehicle won’t be at risk of repossession (though you’ll still face other financial consequences if you default on a personal loan).

Potential Drawbacks of Personal Loans

Although personal loans have multiple benefits when compared to other loans, they’re not always the right choice for everyone or every situation.

May Increase Debt Load

If you’re using a personal loan to pay off or consolidate higher-interest debt, you won’t increase your overall debt burden by taking out the loan—in fact, you’ll be able to reduce your debt by paying a lower interest rate. 

But if you’re using the personal loan to take on a new expense, this will increase your debt burden and may make it tougher to qualify for other credit in the future. Use online calculators to see how much you’ll end up paying overall to decide whether taking out this loan is the best step for your financial future.

Not Necessarily the Lowest-Interest Option

In some cases, a personal loan may not be the best loan product. 

For example, if you plan to use personal loan funds to attend classes at a local college, you could find that student loans have far more favorable repayment terms or a lower interest rate. If you’re using these funds to put down new flooring in your home, a home equity loan or line of credit may allow you to stretch these funds by paying a lower monthly payment. 

Always consider what other loans are available and what rates and terms they offer before deciding on a personal loan.

May Have High Fees and Monthly Payments

Depending on the loan you choose, you could wind up paying origination fees and other fees that add to the total cost of the loan. You may also have a higher monthly payment than you would with a credit card or home equity loan; if this payment is too high for your budget, you could be at risk of falling behind on other bills.

It’s also important to see whether a loan product has any prepayment penalties. It can often make sense to pay a loan off early if you can, as this will reduce the total interest you pay; however, if your loan has a prepayment penalty, there’s no financial benefit to paying it off early.

Consider Pros and Cons of Personal Loans First

Personal loans can be a great option in the right situation. If you need funds quickly, have good enough credit to get a competitive interest rate, and don’t want to worry about putting up collateral for a loan, you may find that a personal loan meets your needs. 

But before taking out a loan, ask yourself the following questions:

  • Is there another source of funding that would be better suited to this situation?
  • Have you shopped around to make sure you’re getting the best interest rate and terms?
  • Will taking out a personal loan reduce the interest rate or monthly payment on the loans you have now?
  • Can you afford to repay the loan on the terms offered?
  • If you’re taking out the loan to pay off other debt, have you addressed the issue(s) that caused you to rack up debt?
  • Do you have a plan for how to use the funds?

It’s also crucial to go through the loan’s terms and conditions with a fine-toothed comb before you sign. These terms can be dense, complex, and hard to understand. 

Understanding Personal Loan Terms and Conditions