Personal loans can be very helpful to borrowers. It can help you improve your credit score, and can help you pay off other debt with high interest. Yet they also have several disadvantages that borrowers should be aware of. Before applying for a personal loan, you should consider both the pros and cons of personal loans and see if getting a loan would help your case or harm it.
Pros & Cons of a Personal Loan
| Pros | Cons |
| Improve your credit score | Requires Interest rates |
| Extreme flexibility | Could keep you in debt |
| Fixed monthly payments | Hard credit check |
| Pay off debt | Origination fees |
| Swift decision | Late fees and penalties |
| Unsecured loans | Collateral for a secured loan |
Pros of a Personal Loan
- Improve your credit score - Paying off the personal loan on time and in full amount will ultimately improve your credit score because the lender will send your payment history to the credit bureau.
- Extreme flexibility - Personal loan lenders do not ask why you need the funds and you are free to use the money you borrowed in the way that you see fit. So you can purchase something you need, pay off a medical bill, start a new business, or even go abroad on a vacation.
- Fixed monthly payments - Paying back a personal loan is usually made in small payments over a period of a year and up to 5 years. You will be able to plan those payments easily because before signing the contract, the amount you'd have to pay will be clearly laid out.
- Paying off debt - In the case that you already have some debt with a high-interest rate, you can use the funds from a personal loan with lower rates to pay them off, which would ultimately save you money in the long run.
- Swift decision - getting a final decision after applying for a personal loan usually takes a week at the most, and you can get funded on the same day of approval. The fastest option for a quick decision is to apply for a personal loan online.
- Unsecured loans - You can apply for an unsecured personal loan which typically needs no collateral.
Cons of a Personal Loan
- Requires interest rates - While applying for a personal loan you will be charged interest rates. APRs of personal loans usually range between 6% and 36%, depending on the lender and on your credit score. It means you will end up paying back more than the amount that you borrowed.
- Could keep you in debt - Borrowers might get a personal loan and spend it on something that isn't truly necessary or urgent. Or they may fail to pay it back and fall into debt.
- Hard credit check - Some personal loan lenders will perform a hard credit check which would affect your score even temporarily. Once your credit score decreases, it would be difficult for you to take out another loan. However, your score will improve quickly once you settle the loan or any other debt.
- Origination fee - Personal loan lenders might need to pay an origination fee unless your credit score is higher than 660. The origination fee is paid for the application process and you might have to pay it before taking the funds, or it can be added to your loan, or removed from the amount you borrow.
- Late fees and penalties - The lender can charge borrowers late fees if they do not pay the monthly payment on time. Some lenders also charge prepayment penalties if the borrower wants to pay off the personal loan early, however, top lenders rarely charge this penalty fee.
- Collateral for secured loans - Getting an unsecured loan that doesn't require collateral needs a borrower with a minimum credit score of 585. Other borrowers will need to provide collateral with a secured personal loan risking to lose an item of value that they possess.