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

Personal loans aren't inherently bad, but they can become a poor choice when the annual percentage rate (APR), fees or monthly payment outweigh the benefit. A personal loan is a lump-sum installment loan that you repay in fixed monthly payments, and it can be a useful financial tool when managed responsibly.

Personal loans may make sense for consolidating higher-interest debt or covering an important expense. However, they can become costly if you borrow more than you can afford or accept unfavorable terms. Here’s when a personal loan makes sense and when it doesn’t.

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When does refinancing usually not make sense?

Your credit improvesTerms stay similarFees outweigh the interest savingsRates drop slightlyIncome increases

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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. APRs can climb to about 36%, and origination fees or prepayment penalties can add meaningfully to your cost.

• 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 may be 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. Consider one in these situations.

1. You Qualify for a Lower Interest Rate

Consider a personal loan if its APR and fees are lower than the cost of the debt you’re replacing.

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.

Consider a personal loan if a fixed payment would make the expense easier to budget for.

3. You Want to Build Credit Over Time

Making consistent, on-time personal loan payments can strengthen your payment history, which is the most important factor in many credit-scoring models.

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: Avoid the loan if the APR makes the total repayment cost unreasonable for your budget.

2. Fees Increase the Total Cost

Some personal loans charge an origination fee between 1% and 8% of the loan amount or prepayment penalties, which are around 2% of your balance.

Rule of thumb: Compare the amount you receive with the amount you’ll repay after interest and fees.

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: Don’t borrow unless the payment fits comfortably alongside your essential expenses.

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: Only accept the loan if you have a realistic plan to make every payment on time.

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 adding debt for nonessential spending or to cover an ongoing budget shortfall.

How Do Personal Loans Affect Your Credit?

Applying for a personal loan can cause a small, temporary credit-score drop, but making on-time payments may help strengthen your credit over time.

Alternatives to Personal Loans To Consider

If a personal loan is too expensive or doesn’t fit your situation, another option may help you reach the same goal with less cost or 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 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.

Save Up Instead

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

Before accepting a personal loan, make sure the cost, terms and monthly payment support your financial goals. Use this checklist to reduce the risks.

1. Check your credit: Review your credit before applying so you have a better idea of the interest rates and terms you might qualify for.

2. Borrow only what you need: Use a loan calculator to confirm that the estimated payment fits comfortably within your budget.

3. Prequalify with several lenders: A soft credit check can help you compare potential rates, terms and loan amounts without affecting your score.

4. Compare the full terms: Review the APR, origination fees, repayment period, monthly payment and any prepayment penalty.

5. Make a repayment plan: Decide how you’ll make every payment before accepting the loan. Autopay may help you avoid missed due dates.

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?"

Photo Credit: iStock.com

Data is accurate as of July 29, 2026, and is subject to change.