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 build credit, they allow consumers to pay off big expenses over time, and they can be used for anything. Major drawbacks 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.
• High versatility: 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.
• 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 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.
• No collateral: Most personal loans are unsecured, meaning they don’t require any collateral. If you can’t pay the loan back, the lender can’t immediately take your possessions. They’ll have to send your debt to collections or take you to court.

Cons of Personal Loans:

• 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.
• 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.
• 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%.
• Origination fee: Personal loans may charge an origination fee, to cover the cost of processing your application. You might have to pay it upfront. Or it might get added to the total amount of your loan, or deducted from the amount you initially receive. It takes a credit score of 660 or higher to get a loan without this fee.
• Other fees: Personal loan providers often charge late fees if you don't pay the monthly bills on time. Some also charge a prepayment penalty for paying off your loan early. This lets them make back some of the money they didn’t earn in interest. But prepayment penalties are rare, and none of the top 15 lenders charge them.
• Collateral on secured loans: People with credit scores of 585 or above can usually qualify for unsecured personal loans, which do not require any collateral. But people with scores below that may have to get a secured personal loan, which requires the borrower to offer something valuable as collateral to open the loan. The lender can keep the collateral if you default.

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.