Personal loans can be mixed blessings. A personal loan can help you finance a large purchase or consolidate credit card debt into a single fixed monthly payment. But, as with any financial product, there are also drawbacks. Interest rates and other loan costs can be high, and taking on a new form of debt can hurt your credit.

Before you take out a personal loan, it’s a good idea to fully think it through in order to determine whether it’s the right choice. Here are some tips to help you weigh the pros and cons and decide whether to take out a personal loan.

[Read: Best Personal Loans.]

Compare the Pros and Cons of a Personal Loan

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What Are the Pros?

If you need cash for a home improvement project or to cover medical expenses — and can afford to repay — personal loans can be a great option. Personal loans tend to have better interest rates than other forms of credit and most are unsecured, which means they don’t require collateral.

Build Credit

The payments on your personal loan are usually reported by the lender to the three major credit bureaus. Your payment history accounts for 35% of your FICO credit score, so if you consistently make on-time payments, your credit score can increase.

Pay Over Time

Personal loans are disbursed upfront as a lump sum, enabling you to cover a large purchase and pay for it over time.

Debt Consolidation

If you’re looking to pay off credit card balances or other debts, consider a debt consolidation loan. This type of personal loan helps streamline your debt and reduces the number of monthly payments you need to keep track of.

Versatility

While some loans can only be used for certain purposes, personal loans can be used for a wide range of needs, from consolidating debt to funding a wedding. Acceptable loan use varies by lender, but most allow borrowers to use their funds for nearly any personal, family or household expense.

Competitive Rates

Annual percentage rates for personal loans tend to range from 6% to 36%. Even though the upper range of APRs can get high, many applicants will end up qualifying for a lower APR than they’d get on a credit card.

Flexible Limits

Personal loans are typically available between $1,000 and $100,000, depending on the borrowing limits set up by various lenders. This wide range makes it possible for borrowers to tailor the amount to their specific needs.

Extended Loan Terms

Personal loans usually have loan terms that range from two to 10 years, depending on the lender. This helps you find a monthly payment that works for your situation. However, the longer the loan term, the more interest you’ll end up paying over the life of the loan.

Fast Cash

The application and funding process for personal loans varies by lender, but many boast same- or next-day funding. If you find yourself facing unexpected medical costs or emergency home repairs, a personal loan may solve your problems quickly.

Ease of Management

Compared with having several credit card balances with varying interest rates and due dates, a personal loan that comes with a single, fixed-rate monthly payment is easier to manage.

[Read: Best 0% APR Credit Cards.]

What Are the Cons?

There are also downsides to personal loans, so carefully evaluate your options before choosing to borrow.

High Interest Charges

Personal loan applicants with good credit can expect to qualify for a low APR, but bad-credit borrowers can see rates up to 36%. This rate could end up being higher than financing alternatives, such as home equity loans or 0% APR credit cards.

Fees and Penalties

Lenders may charge origination fees and application fees that can increase the cost of borrowing. Kevin Feig, a certified financial planner and founder of Walk You To Wealth, says origination fees can range anywhere from 1% to 10%. As a result, it’s important to pay attention to a loan’s APR and not just the interest rate because it includes these costs. Borrowers may also face penalty charges for late payments or having insufficient funds.

Credit Risks

Borrowers who struggle to keep up with payments or default on a personal loan face negative credit reporting. Plus, applying for a personal loan means the lender will make a hard inquiry into your credit, which temporarily lowers your credit score.

Additional Debt

Taking out a personal loan means assuming debt. It’s important to understand why you’re borrowing the funds and whether taking out a personal loan is the best solution for your needs.

Tough Eligibility Requirements

If you have bad credit, it may be difficult to qualify for a personal loan and limit your choice of lenders. If you’re counting on a cosigner to strengthen your chances, you may have to think again, since some lenders don’t allow them.

Alternatives to a Personal Loan

Before you take out a personal loan, make sure you consider some of these alternatives:

— Home equity loan or line of credit. You can choose to receive your money in a lump sum right away with a home equity loan or open a revolving home equity line of credit, or HELOC. Because both types of loans are secured by your home, the interest rates will likely be lower than that of a personal loan.

— 401(k) loan. You may be able to borrow from your retirement savings plan, but this type of loan comes with some potential drawbacks. You will need to pay back whatever you access, with interest, though you are paying yourself. The funds you borrow will miss out on any potential market gains, and if you lose your job, you’ll need to repay the loan by the next tax-filing deadline.

— Low-interest credit cards. You can transfer your high-interest balance from one credit card to a new one with a promotional 0% APR. This approach can work if you’re disciplined with your spending. “While low- or no-interest offers sound appealing, they often come with limited terms, after which the interest rate may spike,” says Craig Toberman, a certified financial planner and partner at Toberman Becker Wealth. “Proper budgeting ensures the debt is fully paid within the promotional window.”

[Read: Best Debt Consolidation Loans.]

Is a Personal Loan Right for you?

A personal loan could be the right choice if you:

— Want to consolidate debt

— Have good credit and qualify for low interest rates

— Prefer to borrow without pledging collateral

— Want quick approval and disbursement

FAQs

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The Pros and Cons of Personal Loans originally appeared on usnews.com

Update 06/02/25: This story was previously published at an earlier date and has been updated with new information.