Pros and Cons of Personal Loans

Personal loans are some of the most common loan types out there, and if you need some extra funds, you have likely come across them in your search. Just like any other form of funding, there are both pros and cons of personal loans. For example, some personal loans are difficult to qualify for with a low credit score. Fortunately, other personal loans may be considered bad credit loans, which you may still be eligible for with a poor credit history.  

Pros of Personal Loans

Personal loans may be considered some of the most popular loan types available. According to the U.S. Chamber of Commerce, there are over 21 million outstanding personal loans in the United States.1 Personal loans definitely have their advantages that you should know about if you are deciding to go with one of these loans to cover your expenses. Here are some pros you may be able to get with a personal loan: 

The Process Can Be Fast

Nowadays, most personal loans can be applied for online, making the application process fast. In most cases, you’ll be able to fill out an application online in just a few minutes and submit your documents from home. The funds can be sent to you, sometimes as soon as the next business day after final approval! 

You’ll Get the Money in a Lump Sum

Common uses for a personal loan include debt consolidation or large purchases, and because personal loans offer funds in a lump sum, they may be perfect for these kinds of larger expenses that require money upfront. 

Repayment Will Usually Be Predictable

Most personal loans with a fixed interest rate can be considered installment loans because they offer steady monthly payments until the loan is paid back in full. And so, with a personal loan, you can expect a predictable repayment schedule which can be helpful if you are on a tight budget

You May Be Able To Get a Long or Short Term Loan

Another flexible thing about personal loans is that they can be short-term or long-term. And so, whether you want a few months or longer to repay your loan, you will likely find a personal loan that will accommodate that.

With the Right Lender, Eligibility May Be Flexible

Some personal loans can be strict with approval; however, there are some lenders and some personal loans that offer flexibility. For example, some unsecured personal loans may be more challenging than secured loans to get approved for. Banks and credit unions may be more strict than other online lenders. So definitely look at a secured personal loan or flexible lenders if you are having trouble getting approved for a standard unsecured personal loan. 

Convenient Interest Rates

With the right personal loan, you could get a reasonable interest rate on your loan. Interest is a huge component of the overall cost of the loan and your monthly payment. So it is essential to consider your options carefully before deciding on a personal loan. An easy way to do this is to apply for pre-approval, which might give you estimates without going through a hard credit check

You Can Use Personal Loans For Many Different Expenses

Some loan options can only be used for a specific purpose, but the convenient thing about personal loans is that you can use them for several different kinds of expenses. 

As mentioned above, many people use personal loans for large purchases or to consolidate debt (loans, credit card balances, etc.). Still, you can also use a personal loan for medical bills, rent or mortgage payments, utility bills, or other unexpected emergencies that pop up.

Potential Cons of Personal Loans

Although personal loans have advantages, there are some disadvantages you should know about if you are deciding whether to borrow money using one of these loans. Here are some cons you may find with personal loans: 

Some Lenders Are Pretty Strict With Eligibility

If you don’t have the best credit history or income, then it may be difficult to get personal loan approval from some lenders. And so, if you don’t have any time to search for lenders, then a personal loan may not work for your emergency situation. 

There May Be a Lot of Fees Depending on the Lender and Your Payment History

Most loans have origination fees (origination fees are a type of underwriting charge); however, some lenders have more fees in their loan terms. For example, some lenders have prepayment penalties if you do decide to pay back your personal loan early. Also, some lenders may have higher late fees than others, which you should consider, but it shouldn’t necessarily be the most important factor when picking one loan over the other.

Any Loan, Including a Personal Loan, Will Increase Your Debt

Another thing to think about when taking out a personal loan is that it will increase the amount of debt you have. 

If you already have a lot of other debt you are paying off, such as credit card debt, then adding another loan may complicate your finances. And so, before taking out a personal loan, take a look at your financial situation and consider whether another loan makes sense for your budget. 

You May Hurt Your Credit Score

There are a few ways that any loan, including a personal loan, may hurt your credit score, depending on your existing debt and how you make payments. Your credit utilization and debt-to-income ratio are important factors affecting your credit scores, expressed in percentages. And adding more debt can increase those percentages of debt.

When it comes to your actions after taking out a loan, your payment history will be a huge factor that can impact your credit. This is because it is the largest factor that impacts credit, so even a single late payment may hurt your credit score, while a positive payment history will help. 

It’s also important to note that late payments may remain on your credit report for up to seven years. Missing multiple monthly payments can lead to loan default or your account going to collections. Both things will hurt your credit and remain a part of your credit history for a number of years. 

Types of Personal Loans

Some common types of personal loans include: 

  • Secured personal loans
  • Unsecured personal loans (According to TransUnion, the average unsecured personal loan balance in 2022 was approximately $9,8962)2
  • Fixed-rate personal loans
  • Variable-rate personal loans
Type of Personal LoanDescription
Secured LoansThese loans require collateral, such as a car or house, which the lender can take if the borrower defaults on their loan. 
Unsecured LoansThese loans do not require collateral. Instead, they are based on the borrower’s creditworthiness, income, and other personal financial data.
Fixed-Rate LoansThese loans have a constant interest rate that does not change over the life of the loan terms. This makes payments predictable and often more manageable for many borrowers. 
Variable-Rate LoansThese loans have an interest rate that can change over time, typically in line with a benchmark interest rate. This can make payments less predictable and potentially stressful depending on the financial situation of the borrower.  

The Best Personal Loans…

There are many personal loan lenders out there, and whether you are looking at a secured loan or an unsecured loan, you may be a little overwhelmed with all your options. Finding the best personal loan for you will really depend on your personal situation. However, there are some general qualities that the best personal loans will have in common. Here is what you should look for:

A Loan Amount That Covers Your Expenses

The last thing you want to do is take out a loan only to end up needing more money to cover your original expenses. And so your personal loan should be enough to cover whatever expenses you have. 

Personal loans typically start at a few hundred and go up to a few thousand, so keep that in mind. You also never have to borrow more money than you need, even if offered. 

Manageable Monthly Payment

Your monthly payment is an important factor to consider with a loan. You’ll want something that fits your budget comfortably because missing even a single payment will be harmful to your credit score. 

A Suitable Repayment Period

The best personal loans are flexible with repayment lengths, which can be personalized to your needs. Remember, a shorter loan will mean higher monthly payments but less interest over time. At the same time, a longer loan will mean smaller monthly payments but more interest.  

Easy and Fast Loan Processing 

Another quality of the best personal loans is that they simplify the application and funding process. If things are overly complicated, it can add unnecessary stress to the process, so find a lender that simplifies things! For example, an online process may be much faster and easier than an in-person one with a bank or credit union. 

Competitive Interest Rates

Although interest rates shouldn’t be the only deciding factor for a personal loan, they will encompass much of the cost; therefore, it is vital to pay attention to them. The best personal loans have competitive interest rates for every financial situation.

Flexible Throughout the Process

You are going to want to work with a lender/personal loan that provides flexibility from beginning to end. You may not think about this if you don’t have poor credit or are confident that you can repay your loan on time, but flexibility will be crucial if your finances change during repayment. 

Ask your lender about how they handle things like grace periods, early payments, payment options, and anything else you are curious about. 

Exceptional Customer Service

The best personal loans have an excellent customer service team behind them. We all know how frustrating it can be to contact a business and not get a hold of them or have an unpleasant or unhelpful interaction. And so, looking at past reviews of a lender before deciding to work with them is essential. 

Is a Personal Loan the Right Option for You?

A personal loan may be right for you if a few or more of the following things apply to you:

  • If you have a one-time expense that you need to take care of rather than an ongoing expense. 
  • You know exactly how much money you need. 
  • You want a loan term that comes with a fixed payment schedule. 
  • You are trying to build credit history. 
  • You need a fast loan. 
  • You have multiple one-time expenses you need to take care of.

Things You Can Do To Get the Best Personal Loan Terms

Your personal loan terms will be determined by a few different factors with your finances, including your credit score, income, and ability to repay a loan. If you don’t have the best financial situation right now, you may be wondering what you can do to get approval and the best loan terms possible:

  • Improve your credit score as much as possible. 
  • Show all your income sources! 
  • Pay off existing debt, if possible, before applying for a loan.
  • Apply for pre-approval with a handful of lenders. 
  • Add a cosigner or co-borrower to your loan application.

Personal Loan FAQs

Who offers personal loans? 

Many different types of financial institutions offer personal loans, including banks, credit unions, and online lenders.

What are some alternatives to personal loans?

Alternatives can include credit cards, home equity loans, payday loans, borrowing from friends or family, or even crowdfunding. Each of these has its own pros and cons.

What is the maximum loan amount that I can borrow? 

The maximum amount you can borrow with a personal loan varies by lender, but it can range from a few thousand dollars to $100,000 or more. The amount you can borrow with a personal loan depends on various factors, including your credit score, income, and the lender’s policies.

Who decides the interest rate for a personal loan? 

The lender decides the interest rate for a personal loan. They base this decision on several factors, including your credit score, income, loan amount, loan term, and their own internal policies.

Who benefits from a personal loan? 

Both the borrower and the lender can benefit from a personal loan. The borrower gets access to funds they need, and the lender earns interest on the loan.

Where can I find the best personal loan rates? 

The best personal loan rates can often be found by shopping around and comparing offers from different lenders. Online comparison tools can be helpful for this.

Where can I get a personal loan with bad credit? 

Some lenders specialize in offering personal loans to people with bad credit. However, these loans often come with higher interest rates than loans offered to people with good credit.

Where can I get a personal loan with no credit check? 

Some online lenders and payday loan companies offer loans without a traditional credit check. However, no credit check loans often have very high-interest rates and fees.

Where can I get a personal loan online? 

There are many online lenders that offer personal loans, such as CreditNinja! However, it’s a good idea to compare rates and terms from different lenders before deciding on one.

The Bottom Line from CreditNinja

Just like any loan, personal loans have their sets of pros and cons. It is imperative to know more about them before borrowing money through them. The good news is that personal loans are some of the best loan options available, even if you don’t have the best credit history! And CreditNinja is always here to help with your personal loan needs. They may be used for a variety of purposes, such as consolidating debt, catching up on bills, and more! Before you decide on a personal loan, it will be important to review some variables such as the loan length, interest rate, the lender, repayment terms, and more!


  1. Personal Loan Statistics | Chamber of Commerce
  2. Personal Loan Statistics for 2022 | The Motley Fool
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