What are the pros and cons of personal loans?

There are both pros and cons of personal loans, but the pros can easily outweigh the cons in the right situation. Some of the biggest benefits of personal loans are that they can help you build credit, they make it possible to pay off big expenses over time, and they can be used for just about anything.

Major cons of personal loans include interest charges and fees, along with potential credit score damage if things don’t go as planned. It’s important to weigh the advantages and disadvantages of personal loans before deciding whether or not to apply for one. We’ll help you do just that below.

Top 5 Pros and Cons of Personal Loans 

Pros of Personal Loans

Credit building

You will have to make monthly payments, and your lender will report your payment history to the credit bureaus. If you pay on time every month, you can expect your credit score to increase.

Ability to pay over time

A personal loan will allow you to spend a lump sum of money and then pay it back over the course of 12-60 months, typically. So your financial burden in any one month will be relatively small compared to the total. In addition, you know what your payment will be each month, which allows you to plan ahead.

Ability to consolidate debt

If you have multiple debts with high-interest rates, you may be able to take out a personal loan with a lower interest rate and use the loan to pay off the existing debts. That leaves you with only one monthly payment and less interest accumulation.

Quick decisions

It typically takes 7 business days or fewer to get a personal loan. You may even be able to get approved and receive your funds the same day in some cases. Applying online gets you the fastest decisions.

Can be used for almost anything

You can use a personal loan for almost anything you want. Some of the most common reasons for getting personal loans include home improvement, rent, electricity bills, medical expenses, funding a small business, and travel.

Cons of Personal Loans

Interest charges

The ability to pay off a balance over a period of months comes with the downside that you have to pay interest. Depending on your credit and the lender, your APR could be anywhere from around 6% to 36%.

Potential fees

Personal loan providers may charge origination fees, which are typically about 1% - 8% of the loan amount, but there are lenders that don’t charge origination fees at all. Additionally, some lenders might have late payment fees or prepayment penalties. If you’re not on top of the payments, the fees can add up over time.

Short-term credit damage

Applying for a personal loan results in a hard inquiry on your credit report. This will cause a small, temporary drop in your credit score. In addition, the extra money you owe will raise your debt load, which will also impact your score and make it riskier for lenders to give you additional loans. But as long as you use the loan and other credit responsibly, you should bounce back quickly.

Collateral sometimes required

Most unsecured personal loans require a credit score of at least 585. If you have a score below that, you might consider getting a no-credit check loan, although your rates won’t be the best.

Your best bet might be getting a secured loan using something valuable as collateral, such as a car, home, or money in a savings account. This could get you a good rate, but the lender can keep the collateral if you default.

Ability to rack up unnecessary debt

Since personal loans don’t really limit what you can do with the money, it’s possible to go into debt for something you don’t really need. In addition, you could end up borrowing more than you can afford, though lenders try to prevent that by looking at your existing debts and expenses.

All in all, personal loans are useful for a large variety of purposes, and they allow you to pay off big expenses over time. But they also have the potential to be very costly. Before taking one out, make sure to compare personal loan rates on WalletHub.