When faced with unexpected expenses or the burden of high-interest debt, many people ask themselves, “Should I get a personal loan?” It’s a valid question. Personal loans can offer quick access to cash, predictable payments, and the flexibility to cover a wide range of needs. But they’re not always the best solution. In this article, we’ll break down what personal loans are, explore their pros and cons, and help you decide whether a personal loan, a home equity loan, or even a credit card might be the right choice for your financial situation.
What Is a Personal Loan?
With a personal loan, you borrow money from a bank, credit union, or online lender. You get the funds in a lump sum and then pay it back over time, with interest. Most personal loans are unsecured, meaning you aren’t required to put your own personal property on the line. While an unsecured loan won’t result in you losing your home, car, or other possessions if you fail to pay it back, defaulting on it can still have major repercussions—namely, having a huge negative impact on your credit score.
Personal loans can be used for a variety of purposes, including paying off credit card debt, covering medical expenses, making home repairs, or funding events like weddings or vacations. To get a personal loan, you typically apply online or in person and the lender reviews your application. If approved, you receive the funds and then pay the loan back through fixed monthly payments that include interest charges.
Benefits of Personal Loans
Personal loans offer several advantages, especially if you need money quickly and want predictable monthly payments. Potential benefits include:
While personal loans can be a helpful way to get the funds you need, they’re not for everyone. Here are some things to watch out for:
In many cases, a personal loan isn’t your only option. Before deciding, take time to explore other financing methods to see if they better align with your financial situation. Depending on your goals and needs, one of these alternatives might be a good fit:
These are some scenarios where a personal loan might be a good fit:
What Is a Personal Loan?
With a personal loan, you borrow money from a bank, credit union, or online lender. You get the funds in a lump sum and then pay it back over time, with interest. Most personal loans are unsecured, meaning you aren’t required to put your own personal property on the line. While an unsecured loan won’t result in you losing your home, car, or other possessions if you fail to pay it back, defaulting on it can still have major repercussions—namely, having a huge negative impact on your credit score.
Personal loans can be used for a variety of purposes, including paying off credit card debt, covering medical expenses, making home repairs, or funding events like weddings or vacations. To get a personal loan, you typically apply online or in person and the lender reviews your application. If approved, you receive the funds and then pay the loan back through fixed monthly payments that include interest charges.
Benefits of Personal Loans
Personal loans offer several advantages, especially if you need money quickly and want predictable monthly payments. Potential benefits include:
- Versatility. You can use a personal loan for almost anything—medical bills, car repairs, or even debt consolidation.
- Fixed Payments. You’ll know exactly how much you owe each month. This makes budgeting easier and more predictable.
- No Collateral Required. Since most personal loans are unsecured, you don’t risk losing your home or car.
- Fast Access to Funds. Approvals for personal loans often take minutes to a few days, and funds are typically distributed soon after approval. This is much faster than many other types of loans, including home equity loans, which require more paperwork and decision-making.
- Debt Consolidation. If you are struggling to pay off multiple credit cards, a personal loan can allow you to combine that debt into one loan payment—often with a lower interest rate. This can make it easier to pay off debt and prevent interest charges from accumulating.
- Credit Building. Making on-time payments on a personal loan can help improve your credit score over time.
- Lower Interest Rates Than Credit Cards. If you have good credit, personal loan rates are usually lower than those on most credit cards.
While personal loans can be a helpful way to get the funds you need, they’re not for everyone. Here are some things to watch out for:
- High Interest Rates for Some Borrowers. Because personal loans are usually unsecured, they have higher interest rates than secured options like home equity loans. Also, rates tend to increase the worse your credit is, making them an expensive funding source for some borrowers.
- Fees. Some lenders charge origination fees for personal loans, and others may charge a penalty if you pay off the loan early. At BankFive, we don’t charge an application fee, origination fee, or closing costs for our personal loans, nor do we charge a pre-payment penalty. But if you’re looking at another lender for your personal loan, be sure to do your homework before applying so you don’t end up paying unnecessary fees.
- Credit Risk. As with any form of credit, whether it be a loan or credit card, it’s crucial to use it responsibly. Missing payments on a personal loan can damage your credit and make it difficult for you to buy a home or car down the road. Remember to never take on debt unnecessarily. Only apply for a personal loan when you really need the funds, and prioritize paying it back.
In many cases, a personal loan isn’t your only option. Before deciding, take time to explore other financing methods to see if they better align with your financial situation. Depending on your goals and needs, one of these alternatives might be a good fit:
- Home Equity Loans: Home equity loans typically offer lower interest rates than personal loans because they are secured by your home. They also typically allow you to borrow more money than you can with a personal loan. This makes them a good option for large expenses such as home renovations or college tuition. However, since your home serves as collateral, failing to repay a home equity loan could result in losing your property. Home equity loans also tend to come with longer repayment terms than personal loans, which can make monthly payments more manageable.
- Credit Cards: Credit cards can be a flexible borrowing option, especially for smaller purchases or debt consolidation. Many cards offer 0% introductory rates for a limited time, which can be beneficial for short-term borrowing. However, once the promotional period ends, the interest rates on these cards usually increase significantly, making them less ideal for long-term debt.
These are some scenarios where a personal loan might be a good fit:
- You have a strong credit score and qualify for a low interest rate.
- You want to consolidate high-interest debt.
- You have a steady income and can make the required monthly payments.
- You don’t qualify for a 0% credit card or will need more time to pay back the money than the card’s promotional window.
- You either don’t qualify for a home equity loan or need the funds faster than a home equity loan can provide.