Are Personal Loans Bad? When They Help and When They Hurt

Personal loans aren't inherently bad. A personal loan is a lump-sum installment loan that you repay in fixed monthly payments, and it can be a smart financial tool when used responsibly.

They're often a good choice for consolidating higher-interest debt or covering large expenses, but they can become costly if you borrow more than you can afford or accept a high interest rate. Here's when a personal loan makes sense and when it doesn't.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you.

Key Takeaways

• Personal loans aren't always bad when you use them responsibly. How one affects you depends on your credit profile, the loan terms and how reliably you repay.

• The risks are real for borrowers with weaker credit. Annual percentage rates (APRs) can climb to about 36%, and origination fees or prepayment penalties can add meaningfully to your cost.

• A personal loan can either build or dent your credit. A new loan adds a hard inquiry and lowers your average account age, but on-time payments strengthen your payment history.

• Prequalifying with several lenders helps you find the best offer. A soft credit check lets you compare real rates and terms without affecting your score.

Summary generated by AI, verified by MoneyLion editors

When Is a Personal Loan a Good Idea?

A personal loan is a good idea if you need to make a large purchase, it ends up saving you money or it offers a way to help you stay on top of your finances. Here are a few tips:

1. You Qualify for a Lower Interest Rate

The latest Federal Reserve research puts the average interest rate on a 24-month personal bank loan at 11.40%, while the average credit card APR runs much higher at 21.52%.

Borrowers with good-to-excellent credit can often qualify for a personal loan APR in the high single digits — between 7% and 9%. That's why personal loans are often used to consolidate high-interest credit card debt.

2. You Want Predictable Monthly Payments

Most personal loans have fixed interest rates, which means your APR stays the same throughout the loan.

You also can't increase the loan balance or spend beyond the original amount, so you'll know exactly how much you owe each month.

3. You Want to Build Credit Over Time

Being consistent and on time with your personal loan payments will improve your payment history, which is the leading factor in determining your credit score.

Personal loans can also improve your credit mix, especially if you didn't have other types, like a credit card, before taking out the loan. Lenders like seeing that you can manage multiple different types of credit.

Risks of a Personal Loan

However, personal loans aren't the right choice for everybody.

1. Your Interest Rate Is Too High

Personal loans can have low APRs, but not everyone can qualify for the best terms. Plus, applicants with fair or poor credit who are approved will likely see APRs at the top end of the lender's spectrum, which can reach up to around 36%.

Rule of thumb: If the APR is very high, it's best to avoid the loan.

2. Fees Increase the Total Cost

Some personal loans charge an origination fee between 0.5% and 1% of the loan amount or prepayment penalties, which are around 2% of your balance.

Rule of thumb: If the fees are too high, reconsider your loan.

3. Monthly Payments Don't Fit Your Budget

A fixed monthly payment can be difficult to manage if your income is unstable or your financial situation changes unexpectedly. Most come with fixed monthly payments that continue until the balance is repaid, so an unexpected drop in income can make repayment more difficult.

Rule of thumb: If you don't have a steady income, taking out a loan could be risky.

4. Missing Payments Can Hurt Your Credit

You can incur short-term credit score damage as a result of a personal loan, since the financing increases your outstanding debts, lowers your credit age and adds a hard inquiry to your credit report.

If you mismanage the loan by skipping payments and accumulating late fees, you risk harming your long-term creditworthiness.

Rule of thumb: Don't miss any payments or accumulate late fees.

5. You're Borrowing for the Wrong Reasons

Unnecessary spending can create or worsen debt issues, and you want to ensure you're not using a personal loan as a bandage for bad spending habits. A personal loan is generally most useful when it helps you save money, consolidate higher-interest debt or pay for an important expense.

Rule of thumb: Avoid taking on more unnecessary debt.

How Do Personal Loans Affect Your Credit?

Personal loans can temporarily lower your credit score when you apply, but they may help build credit over time if you make every payment on schedule.

Alternatives to Personal Loans To Consider

If a personal loan doesn't seem like the right fit, these alternatives may help you reach the same goal at a lower cost or with less risk.

DIY Debt Repayment

If you're considering a personal loan for debt consolidation, see if you can pay down the debt using snowball or avalanche repayment methods.

0% Intro APR Credit Card

These cards offer a 0% APR for a set period, usually 12 to 24 months, on new purchases and/or balance transfers. They're a good option for debt consolidation or financing a larger purchase if you can pay the balance off in the allotted time, as that allows you to avoid interest entirely.

Credit Counseling

Credit counseling agencies provide free financial advice and, for a fee, will set up a debt management plan (DMP). DMPs consolidate debts into one monthly payment made to the credit counselor, who disburses the funds to your creditors as agreed. Ideally, the counselor has negotiated lower balances or interest rates.

BNPL Plans

BNPL programs offer short-term financing for select purchases, often at checkout. These programs generally let you skip or pay low interest, so long as you repay the loan on time. However, they sometimes carry extra fees and should only be used when absolutely necessary.

Advance Savings

If you know a major purchase or expense is on the horizon, consider ramping up your savings to avoid borrowing. You can find ways to fund your emergency savings — for example, by launching a side hustle, selling gently used goods, or pausing or canceling monthly subscriptions.

How To Borrow Money With a Personal Loan the Smart Way

1. Check your credit to get a better idea of what interest rates and terms you might qualify for. Keep in mind that lenders generally require very good to excellent credit and a FICO score of 740 or higher to qualify for their best advertised offers.

2. Borrow only what you need and can afford to repay. Otherwise, taking on a personal loan can lead to larger financial issues. Consider using an online calculator to determine estimated monthly payments based on APRs and repayment periods. Many lenders have these tools directly on their website.

3. Compare fees, terms and repayment timelines to find the best available offer for your credit profile. Consider prequalification — a process in which the financial institution runs a soft credit check to determine approval odds, rate, and term estimates — to get a clearer comparison. Soft credit checks won't impact your credit score.

4. Have a solid repayment plan to avoid using the personal loan for unnecessary spending. Plus, make sure you have a plan to make all payments on time. Use tools like autopay to avoid undue damage to your credit score.

Ultimately, make sure that borrowing money supports your financial goals and doesn't set you back. Taking on debt isn't necessarily bad if you're using it in a way that benefits you.

What To Know About Personal Loans FAQs

Are personal loans bad for your credit?

Personal loans can hurt your credit in the short term, as they increase your total debt level, lower the average age of your credit accounts, and put a new credit inquiry on your credit report. Missing payments on a personal loan also negatively affects your credit in the long term.

On the other hand, personal loans can ultimately enhance your payment history, credit mix and overall creditworthiness when managed correctly.

Will a personal loan solve my money problems?

Personal loans can sometimes be a good way to address pressing financial problems, such as high-interest credit card debt or unexpected home repairs, as they typically carry lower interest rates and have a more predictable repayment structure than other forms of financing.

However, debt is still debt, and failing to repay new outstanding balances as agreed can amplify a bad financial situation.

What is the biggest disadvantage of a personal loan?

Personal loans don't always offer affordable interest rates, as rates vary by credit score. Even if they do, you're still paying to borrow money. Plus, you're locked into making a monthly payment during the loan's term, and could risk missing a payment or, worse, defaulting if your financial situation changes.

How do I know if I can afford a personal loan?

Online personal loan calculators can help you estimate monthly payments based on the interest rate and terms you're eligible for. Getting prequalified can give you a better sense of your offers without hurting your credit score.

When does it make sense to get a personal loan instead of using a credit card?

A personal loan often makes more sense when you qualify for a lower APR than your credit card or need predictable monthly payments for a large expense.

Key Terms

• APR: The yearly cost of borrowing, including the interest rate and certain fees, shown as a percentage. Personal loan APRs typically range from about 6% to 36% depending on your credit.

• Origination fee: An upfront charge some lenders deduct from your loan proceeds, usually 0.5% to 1% of the loan amount, to cover processing.

• Prepayment penalty: A fee some lenders charge for paying off your loan early, often around 2% of the remaining balance.

• Hard inquiry: A formal credit check that posts to your report when you apply for a loan, which can temporarily lower your score.

• Credit mix: The variety of credit types you hold, such as credit cards, installment loans and mortgages, which accounts for 10% of your FICO score.

• Debt consolidation: Combining multiple debts into a single loan, often to secure a lower rate or simplify payments.

• DMP: A repayment arrangement through a nonprofit credit counseling agency where you make one monthly payment that the agency distributes to creditors, sometimes at negotiated lower rates.

• Prequalification: A lender's soft-credit-check estimate of the rate, term and amount you may qualify for, with no impact on your score

Summary generated by AI, verified by MoneyLion editors

Sources

• Federal Reserve.2025. "Consumer Credit — G.19."

• Consumer Financial Protection Bureau. 2024. "What Is a Prepayment Penalty?"

• Consumer Financial Protection Bureau. 2024. "What Is the Difference Between Credit Counseling and Debt Settlement, Debt Consolidation, or Credit Repair?"

• myFICO. "What's in my FICO® Scores?"

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