Personal Loan Benefits: 7 Advantages and Risks
Flexible uses: Personal loans can cover many expenses, but lenders may restrict certain uses and you should borrow only what you can repay.
Predictable structure: Fixed payments and a set term can make budgeting easier, while an unsecured loan may not require collateral.
Trade-offs matter: Compare annual percentage rate (APR), fees, total repayment and credit impact before deciding whether a personal loan is right for you.
Personal loans can offer flexible uses, predictable fixed payments and a set payoff date. They may also cost less than credit cards for borrowers who qualify for a lower annual percentage rate (APR).
But they add debt, fees and a required monthly payment, so compare total costs and make sure the payment fits your budget before applying.
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.
1. You Can Use Them for Almost Anything
You can use personal loans for many purposes, but lenders may restrict certain uses. Common uses include debt consolidation, home improvements, medical expenses, car repairs and large planned purchases. Check the loan agreement before assuming a use is allowed.
Some of the most common types of personal loans include:
Debt consolidation loans: Combine multiple high-interest debts into one manageable payment
Home improvement loans: Finance renovations without tapping into your home equity
Medical loans: Cover unexpected healthcare costs or planned procedures
Major purchases: Pay for appliances, furniture, vacations, timeshares or other big-ticket items
Life events: Fund a wedding, adoption or relocation
If you want the basics before weighing the benefits, learn about what a personal loan is and how this type of installment loan works.
2. Fixed Payments Make Budgeting Easy
Many personal loans have fixed interest rates and fixed monthly payments, which can make budgeting easier. Some loans have variable rates or different payment terms, so confirm whether the payment can change before signing.
3. You Know Exactly When You'll Be Debt-Free
A personal loan has a set repayment term, so you can estimate when you'll pay it off if you make every payment as agreed. Paying extra, missing payments or changing the loan can affect the actual payoff date.
4. Lower Interest Rates Than Credit Cards
A personal loan may have a lower APR than a credit card for a borrower who qualifies for competitive terms, but that is not guaranteed. Compare the APR, origination fee, monthly payment and total repayment cost. A longer personal-loan term may lower the monthly payment while increasing the total interest you pay.
Illustrative comparison: If an $8,000 balance were repaid in equal monthly payments over 36 months with no new charges or fees, the estimated costs would be:
| Credit card (24.99% APR) | Personal loan (12.99% APR) |
|---|---|---|
Monthly payment | ~$318 | ~$270 |
Total interest paid | ~$3,449 | ~$1,702 |
Total cost | ~$11,449 | ~$9,702 |
Potential difference in total repayment: ~$1,747
That could potentially be money back in your pocket. This is why debt consolidation is one of the most popular uses for personal loans. Rolling multiple credit card balances into a single, lower-rate loan could help you save hundreds, or even thousands, in interest over time.
5. No Collateral Required
Most personal loans are unsecured, so they do not require you to pledge a car, home or other asset. Secured personal loans also exist, however. Even without collateral, missed payments can damage your credit and lead to collection activity.
6. Could Help Build Your Credit
Making on-time payments may help build a positive payment history if the lender reports the account to the credit bureaus. A personal loan may also add an installment account to your credit profile.
These effects aren't guaranteed, and applying can temporarily lower your score due to a hard inquiry. If you use the loan to pay down credit card balances, keep those balances down or the potential credit-utilization benefit may not last.
If you borrow within your means and stay on top of your payments, a personal loan can build your credit.
7. Fast Access to Funds
Need money quickly? Some online lenders may approve and fund a personal loan the same day or the next business day after approval. Timing depends on the lender, verification, cutoff time and bank transfer. Fast funding is not guaranteed, and a faster loan may not be the least expensive option.
4 Things To Keep in Mind About Personal Loans
Personal loans come with plenty of benefits, but they're not perfect for every situation. Here are a few things to consider:
Interest costs add up: A lower rate does not guarantee a lower total cost if the repayment term is longer.
Fees may apply: Lenders may charge origination, late payment or prepayment fees. Review the loan agreement and APR.
Borrowing adds debt: Take only what you need and confirm the payment fits alongside your existing obligations.
Credit can change: A formal application may temporarily lower your score, while missed payments can cause more serious damage.
Before you decide, review the pros and cons of personal loans and compare the complete cost with your budget and alternatives.
Bottom Line
Whether you're consolidating debt, covering a major expense or handling an unexpected financial need, a personal loan can be a smart tool when used wisely. The trick is to shop around, understand the terms and make sure the monthly payment fits comfortably in your budget.
Key Terms
Personal loan: A lump-sum installment loan repaid in scheduled payments over a set term.
Annual percentage rate (APR): A yearly measure of borrowing cost that includes the interest rate and certain fees.
Fixed interest rate: An interest rate that remains the same for the loan term, subject to the loan agreement.
Unsecured loan: A loan that does not require collateral, such as a car or home, but still requires repayment.
Debt consolidation: Combining multiple debts into one new loan and monthly payment, ideally at a lower total cost.
Credit utilization ratio: The amount of revolving credit you use compared with your available revolving credit limits.
Hard credit inquiry: A credit check tied to a formal application that may temporarily affect your credit score.
Origination fee: A one-time fee a lender may charge to process and fund a loan, often deducted from the proceeds.
Sources:
Consumer Financial Protection Bureau: What is a personal installment loan?
Consumer Financial Protection Bureau: What is the difference between a loan interest rate and the APR?
Consumer Financial Protection Bureau: When will my lender run or obtain a copy of my credit report?
Consumer Financial Protection Bureau: Do personal installment loans have fees?
Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.
Emily Gadd, CCC™, contributed to editing this article.
Photo credit: fizkes / Getty Images / iStockphoto
FAQs
Personal loans may offer flexible uses, fixed payments, a set repayment term and no collateral when they are unsecured. They may also cost less than credit cards for borrowers who qualify for a lower APR, but fees and total cost still matter.
Applying usually creates a hard inquiry that may temporarily affect your score. On-time payments may help if the lender reports them, while missed payments can cause more serious credit damage.
Some lenders may approve and fund a loan the same day or next business day after approval. Others take longer, and funding depends on verification, cutoff times, lender processes and bank transfers.
It depends on the APR, fees, payment structure and how quickly you can repay. A personal loan may suit a large, one-time expense with predictable payments; a credit card may offer more flexibility for smaller purchases you can repay quickly.
It may not be a good fit if you cannot comfortably make the payment, already have unmanageable debt, would use it for a nonessential purchase or can get a less expensive alternative. Compare the full cost before borrowing.
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