Skip to main content

Pros and Cons of Personal Loans

Key takeaways

  • Personal loans can be a strategic exit ramp from high-interest debt, allowing you to roll costly balances into a single, predictable monthly payment with a better interest rate
  • Carefully weighing the pros and cons of personal loans ensures you aren't creating a bigger financial burden. Some borrowers are a good fit, while others are better off exploring alternatives
  • One of the most appealing benefits of an unsecured personal loan is that you don't need collateral to qualify for funding

Consumers use personal loans for consolidating debt, large expenses such as; weddings, vacations, vehicle purchases and unexpected life expenses. They offer flexibility and convenience, as well as predictable, fixed monthly payments. Even with all their strengths, they aren't a one-size-fits-all solution for every financial situation.

Let's look at the pros and cons of personal loans, so you can decide whether this personal finance tool makes sense for you.

What is a personal loan?

A personal loan is an unsecured installment loan, typically with a fixed interest rate over a defined length of time. Your interest rate is based on your financial information and credit worthiness. There is no need for collateral, as with a car loan or mortgage.

With a fixed rate, you'll know how much you need to repay each month and for how long. This makes budgeting simple and predictable, with no surprises.

You receive the money in a lump sum and can use it for almost any purpose.

Pros of personal loans

There is a reason personal loans are a go-to choice. They offer a unique mix of speed, flexibility, and predictability.

  1. Flexible use of funds. Whether you need funds to cover an emergency roof repair or a dream wedding, you have great freedom in how you spend the money

  2. Predictable monthly payments. With a fixed-rate personal loan, you'll enjoy predictable monthly loan payments. Knowing the exact amount makes it easier to manage your cash flow, use autopay (if it's available) and plan your budget

  3. No collateral required. Since no collateral is required, a personal loan can serve as an alternative to credit cards or other forms of secured financing. You can obtain money without risking your home, car, or other valuable property

  4. Consolidation could lower your interest rate. If you have significant balances on credit cards or other high-interest loans, debt consolidation with a personal loan can save you money. Transferring multiple balances onto one loan with fixed monthly payments also simplifies your finances

  5. Faster funding compared to other loans. Many borrowers appreciate the quick funding speed and online application process. Upon approval, the money could be available in as little as one business day

Cons of personal loans

Even the most helpful financial tools, including personal loans, may not be right for every borrower in every circumstance. Here are some things to check on:

  1. Interest rates may be higher than secured loans. With unsecured personal loans, there is no collateral to reduce risk to the lender. Because of this, these loans may have higher interest rates than some secured loan options

  2. Fees could increase your total cost. You must account for origination fees, late payment fees, and prepayment penalty fees to gauge the total cost of a personal loan. Not all lenders charge these fees, so it's important to check with each potential lender

  3. Monthly payments may stretch your budget. Any time you take out a loan, you add a new payment to your monthly budget. Before taking out a personal loan, make sure you can afford the monthly payment

  4. Taking on debt can affect your credit. When you apply for a personal loan, the lender will perform a hard inquiry on your credit report. This could cause a temporary dip in your credit score. Shopping with lenders that offer prequalification with a soft credit check is a smart way to minimize any impact on your credit score. The credit impact of personal loans goes both ways, however. A personal loan could have a positive impact on your credit score if you make every payment on time

  5. Not everyone qualifies for the best rates. Lenders might advertise a range of interest rates for a personal loan. People with excellent credit scores will get the lowest interest rates. People with lower credit scores will get higher interest rates

Should you get a personal loan?

As you look at personal loan pros and cons, think about which factors carry the most weight in your unique financial situation. For some, the quick access to funds and predictable monthly payments could be essential. For others, the interest rate could be the main attraction.

4 reasons why you should get a personal loan

The simplicity and predictability of a personal loan can be a big draw, especially if you fall into one of these categories:

  1. You want predictable payments. Credit card debt fluctuates according to how much use the card. Even the minimum payment can change from month to month. Fixed-rate personal loans enable you to know from the outset when you'll have the debt paid off and exactly how much your payments will be. This makes budgeting easy and eliminates the stress about a variable interest rate that might be caused by inflation

  2. You want to consolidate high-interest debt. You could replace multiple monthly payments on high-interest rate debt with a single monthly payment based on a lower interest rate. This could save you money and make it easier to manage your finances

  3. You prefer not to use collateral. If you aren't comfortable tying your family home or auto to a loan, you don't have to. With an unsecured personal loan, the lender bases approval on your credit score and finances

  4. You want a clear repayment plan. Personal loans require discipline to make the payments on time each month. With a solid repayment schedule in place, you'll appreciate the ability to steadily pay down the balance instead of carrying revolving debt indefinitely

Why you should not get one

A personal loan might not be the solution to best suit your needs. Here are some reasons you might look for other options.

  1. You don't know if you can manage the monthly payment. If the new monthly payment would strain your resources, you might need to find a different way to manage the situation

  2. You don't need funds immediately. If you don't need the funds right away, it may make more sense to wait and save instead of borrowing

  3. If the loan isn’t solving a real financial problem. Borrowing to cover everyday expenses or an impulse purchase is a risky practice. You are committing to making monthly payments, possibly for several years. If you miss payments, you could damage your credit score. This could affect the interest rates you pay on credit cards and loans, as well as how much you pay for utilities and insurance

FAQs

Many borrowers appreciate the predictable payments that a personal loan provides. Unlike credit cards that carry fluctuating interest rates and variable payments, you could have a single monthly payment that stays the same for the life of the loan.

You can use the funding a wide range of needs, including:

The main trade-off is the cost of borrowing, especially for those who don't have strong credit and might get a loan with a higher interest rate.

Also, the monthly payments could stretch your budget. Before taking out a personal loan, make sure you can afford the monthly payment.

Yes. For the right borrower, debt consolidation with a personal loan is an effective way to reduce the total interest paid.

Instead of juggling multiple due dates and high credit card interest rates, you can combine several balances into one easy-to-manage monthly payment.

Related Articles

The basics and not-so-basics of borrowing

Taking out a loan can be a challenging endeavor. Follow our guides to help you learn more about all the details you need to know on borrowing and lending.

How do personal loans work?

Personal loans allow borrowers to finance weddings, vacations, renovations, large purchases, debt consolidation, and more. Learn more about how personal loans work

How to find the right mortgage—a different kind of home shopping

Shopping for a mortgage is crucial to the homebuying process. Compare non-conventional vs. conventional loans, learn some key mortgage terms and more.

This article is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

†By clicking on this link you are leaving our website and entering a third-party website over which we have no control.

Neither TD Bank US Holding Company, nor its subsidiaries or affiliates, is responsible for the content of third-party sites hyper-linked from this page, nor do they guarantee or endorse the information, recommendations, products or services offered on third-party sites.

Third-party sites may have different Privacy and Security policies than TD Bank US Holding Company. You should review the Privacy and Security policies of any third-party website before you provide personal or confidential information.

Have a question? Find answers here

Popular Questions