Pros and Cons of Personal Loans

Whether you’re looking to consolidate debt, finance a much-needed home renovation or want a little extra cash for a vacation, personal loans may be able to help. This type of loan is typically unsecured, meaning it isn’t backed by collateral such as a home or vehicle. Personal loans also typically have lower interest rates than high interest credit cards.

Personal loans are becoming an increasingly popular method of borrowing for many consumers with good credit. They’re convenient and, in the case of online personal loans, you can even apply at home while you’re in your pajamas. Also, instead of waiting days or weeks for a decision, which can be the case with a home equity loan, you could get a decision within hours when you apply online for a personal loan.

But just because they work for some people doesn’t make them perfect for everyone. Before you settle on a personal loan, you need to consider the pros and cons. Here’s a guide to get you started.

Pros of personal loans

There are good reasons to consider personal loans. 

Convenient and efficient

The process of applying for a personal loan can be relatively simple. Typically, lenders require proof of identity and income, among other factors they find necessary to determine whether they can make you a loan offer, though the required application information varies from lender to lender. Online applications are common and an application could be approved in less than 24 hours. 

Personal loans provide flexibility

Personal loans also afford you freedom and flexibility. Unlike auto loans or student loans, which can only be used for very specific purposes, personal loans can go toward a variety of things, depending on the terms of the loan. One choice is to consolidate high interest rate credit card debt. By consolidating existing debt into a single, lower fixed payment each month, you can streamline how you pay down debt. Personal loans could also be used for such things as vacations, home renovations, weddings and other special events. Approved uses for personal loans vary depending on the lender and loan terms.  

Credit scores and interest rates

The cost of borrowing is an important factor to consider when choosing a loan. You’ll be paying it back for a while, so you want the lowest-cost option. When you apply for a personal loan, your interest rate is typically based on factors such as your creditworthiness and ability to pay.

Each lender has different standards to determine whether or not they will approve someone for a personal loan. Some may also ask for additional documentation such as proof of income, for example.

Generally, the higher your credit score, the lower the interest rate you could qualify for. While not the only factor, your credit score plays an important part in determining not just whether or not you qualify for a personal loan, but how much your interest rate is. 

Cons of personal loans

Personal loans can be a powerful tool to help you take charge of your finances, but there are a few things to consider.

It's a tool, not a cure for spending

Personal loans can help you manage your debt, but they don’t address why you may have accumulated debt in the first place. Personal loans are a type of debt, and taking out a new personal loan means taking on additional debt. Once your debt is paid off, it may be hard to resist building it back up. 

Regular monthly payments

If you’re not comfortable making the same payment every month, a personal loan might not be right for you. While credit cards allow you to make just a minimum payment every month, personal loans typically require the same payment every month.

Is a personal loan right for you?

Personal loans could offer lower interest rates than other types of debt, but you should first do your due diligence to ensure it’s right for your unique situation. That means considering the reasons why you are taking out the loan and engaging in some real calculations to confirm that it fits into your budget.

If you want to consolidate debt, a personal loan could be a sound financial choice. Taking a hard look at your finances and habits can go a long way in ensuring you will be able to meet your debt obligations each month.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.