Disadvantages of Personal Loans (and When They Might be Worth It)
A personal loan comes as a lump sum of money that you can use for almost anything. Your payments will be the same each month, and you might still qualify with less-than-perfect credit.
Still, personal loans aren’t always the cheapest way to borrow and they don’t make sense for ongoing expenses. Knowing the pros and cons of personal loans can help you decide if one is right for you.
Advantages and disadvantages of a personal loan
Advantages
- Low rates for excellent credit
- Can help you save money through debt consolidation
- Easy process and fast funding
- Usually don’t have to risk collateral
Disadvantages
- Doesn’t provide a steady stream of funding
- High rates for bad credit
- Can come with expensive fees
- Higher interest rates than loans that require collateral
What are the disadvantages of personal loans?
Doesn’t provide a steady stream of funding
A personal loan comes as a lump sum of money. With a credit card, you can borrow over and over again, as long as you have the credit available.
- When a personal loan might not make sense: You’re doing a home renovation and you aren’t sure how much the project will cost
- When a personal loan could make sense: Your roof has sprung a leak, and you know how much you need to fix it (research home improvement loans)
High rates for bad credit
A bad credit loan could get you out of a bind, but you could be facing rates of 35.99% (or higher), if you qualify at all. You usually need at least good credit (670+) for affordable rates. Typically, you won’t get the best rates until you’ve hit 740. Always use a personal loan calculator before borrowing.
- When a personal loan might not make sense: If you can’t qualify for an affordable rate or have a lower-interest option
- When a personal loan could make sense: If you have excellent credit or have someone willing to be your co-borrower on a joint loan
Average personal loan rates
| Credit score range | Average APR |
|---|---|
| 720+ | 17.71% |
| 680-719 | 29.96% |
| 660-679 | 42.87% |
| 640-659 | 53.56% |
| 620-639 | 71.45% |
| 580-619 | 116.55% |
| 560-579 | 168.36% |
| Less than 560 | 205.81% |
Source: LendingTree user data on closed personal loans for Q4 2024.
Can come with expensive fees
Some lenders keep a percentage of your loan by charging an origination fee. A high origination fee might mean you need to take out a bigger loan, which means more overall interest. Origination fees are more likely if you have bad credit.
- When a personal loan might not make sense: If your origination fee is excessively high (most origination fees are between 0.99% and 12%)
- When a personal loan could make sense: If you qualify for a no-fee personal loan or the origination fee isn’t so high that the loan is no longer worth it
Higher interest rates than loans that require collateral
Most personal loans are unsecured, which means they don’t require collateral. Generally, unsecured loans have higher rates than collateral loans, like home equity loans. When the lender doesn’t have collateral to repossess, its risk is higher and, in turn, rates are higher.
- When a personal loan might not make sense: If you know for sure that you can pay back your loan and are at peace with the risk that comes with using collateral
- When a personal loan could make sense: If you don’t want to use your house, car or other valuable property as collateral, or don’t have collateral to offer
What are the advantages of personal loans?
Low rates for excellent credit
Personal loans for excellent credit typically come with lower rates than credit cards. For scores 720 and higher, the average personal loan APR is currently 17.71%. Credit card rates, on the other hand, sit at an average 24.23%.
Can help you save money with debt consolidation
Using a personal loan for debt consolidation can help you eliminate high-interest credit card debt. Plus, it puts a stop to the bill juggling. Nearly half (49.9%) of LendingTree users take out personal loans for debt consolidation and credit card refinancing.
To learn more, check out What Is Debt Consolidation, and Is It Right For You?
Easy process and fast funding
Some lenders offer quick loans. With these, you could get same- or next-day funds. You can usually apply for a personal loan online. Some lenders (like Rocket Loans and Upstart) even verify your information electronically. That means you won’t have to find documents to upload or email.
Usually don’t have to risk collateral
Personal loans don’t typically require collateral. That might mean a higher rate, but you won’t lose something valuable if you can’t pay back your loan.
How to minimize the risks of a personal loan
- Have a repayment strategy: Whether you use the debt snowball or the debt avalanche, always know how you’ll pay off your loan before you borrow.
- Only borrow what you need: Padding your loan to pocket extra cash means unnecessary debt and extra interest.
- Improve your credit score first: Raising your score from fair (580 to 669) to very good (740 to 799) can save you over $1,800 in interest on a personal loan, according to a LendingTree survey. A personal loan with a lower rate is a personal loan that’s easier to manage.
- Shop around for the best loan: You could save up to $3,138 by comparing at least six personal loan offers before committing. Loans are sort of like car insurance — you can’t know if you’re getting a good rate unless you check with a few companies.
Compare personal loan rates from top lenders in minutes
5 questions to ask yourself before getting a personal loan
- Is this loan really solving the problem? You can use a personal loan for bills and everyday expenses, but you shouldn’t rely on them on a regular basis. For help breaking the debt cycle, consider credit counseling.
- Have I read the fine print? Don’t sign on the dotted line if you don’t understand your offer. Look for red flags like prepayment penalties. And when comparing offers, make sure you’re comparing apples to apples when it comes to loan amounts and terms.
- Am I sure this is the best rate I can get? Getting multiple offers is key to finding the cheapest rates. Even if you’re in a hurry, take a few minutes to shop with LendingTree. We have the nation’s largest network of lenders, and checking rates won’t hurt your credit.
- Can I make my payments on time, every time? If your budget is shaky, it’s probably best to stay away from personal loans and credit cards. Just one missed payment can drop your credit score by about 100 points if it’s 30 days late.
- Do I only need to borrow once, or will I need money again in the near future? Personal loans come as a lump sum and aren’t designed for ongoing expenses. For that, you’d want something like a credit card or HELOC.
A personal loan can sometimes look cheaper than it is because of its loan term. That’s the amount of time you have to pay back what you borrowed.
Long-term personal loans tend to have lower payments because there’s more time to spread your payments across. At the same time, you will likely end up paying more overall interest. Interest rates are usually higher on longer loans, too.
When you’re in the moment, that extra interest might not seem like a big deal. But you might think differently when you’re five years into your seven-year loan. Don’t let the allure of lower payments lead you to pay thousands more over time.
– Carol Pope, Senior staff writer
Personal loan alternatives if you have bad credit
Buy now, pay later (BNPL) app
Buy now, pay later apps help you break up purchases into payments — usually four, with one due every two weeks. Most BNPL apps use a soft credit pull to determine your eligibility, so they’re generally easier to qualify for.
BNPL could be better than a personal loan for bigger purchases, but only if you have the discipline to avoid overspending.
Paycheck advance app
A paycheck advance app lets you borrow money from your paycheck before you get paid. These apps usually don’t require a credit check. Instead, they review your bank statements to see how much you get paid, when you get paid and your overall spending habits.
A paycheck advance app could be better than a personal loan if you need a little extra cash, but if you make using them a habit, that habit can be hard to break.
401(k) loan
A 401(k) loan lets you borrow from your retirement and it doesn’t require a credit check. The interest you pay also goes back into your 401(k). But if you leave your job while paying back your loan, your remaining balance could be due immediately. You will also be hit with extra tax and penalties if you can’t back your loan and you’re under 59 1/2 years old.
A 401(k) loan could be better than a personal loan if you’re sure that you’ll be at your job for as long as it takes you to pay back what you borrowed.
Personal loan alternatives if you have good credit
0% APR credit card
With a 0% APR card, you won’t pay any interest as long as you pay off your balance within your promotional period. Promo periods usually run from six to 21 months. Some 0% APR cards even come with rewards like cash back, points and miles.
A 0% APR card could be better than a personal loan if you don’t need a long time to pay off what you borrow.
Home equity loan
A home equity loan (or second mortgage) lets you borrow against the equity you have in your house. Home equity loans can be risky because you can lose your house if you fall too far behind. In return, home equity loans are typically cheaper than personal loans since the lender uses your house as collateral.
A home equity loan could be better than a personal loan if you’re a homeowner with equity and are positive you can keep up with your payments.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) also uses your house as collateral but instead of coming as a lump sum, it works like a credit card. You can borrow over and over again, as long as you have the credit available and are within your draw period.
A HELOC could be better than a personal loan if you’re a homeowner with equity, are positive you can keep up with your payments and need money on an ongoing basis.
Frequently asked questions
Taking out a personal loan with no clear payoff plan is a bad idea. You should also avoid high-interest loans if you have bad credit. A personal loan should be a tool that helps you reach your financial goals, not something to rely on to stay afloat long term.
That doesn’t mean that personal loans are always a bad idea. Personal loans offer fast funding and can be a lifesaver in emergencies or for big, planned purchases. Personal loans have also helped countless people save thousands in interest with debt consolidation.
Personal loans can damage your credit, but they can also help it.
Most lenders let you prequalify for a personal loan so you can check rates without hurting your credit. When you formally apply, the lender will almost certainly run a hard credit pull. This will likely drop your score by a few points.
Missed payments can tank your credit. But if you make on-time payments, you should see your score tick up after getting your personal loan. A personal loan can also improve your credit by diversifying your credit mix, which makes up 10% of your FICO Score.
There are plenty of mistakes you can make when getting or using a personal loan, including:
- Panicking and borrowing before figuring out if you can truly afford the loan
- Not shopping around to make sure you’re getting the best rate
- Borrowing more than you need, leading to unnecessary debt
- Choosing a longer loan term than you need, leading to more overall interest
- Not calling your lender to ask for a hardship plan before you start missing payments
- Not exploring personal loan alternatives
Get personal loan offers from up to 5 lenders in minutes
- Advantages and disadvantages of a personal loan
- What are the disadvantages of personal loans?
- What are the advantages of personal loans?
- How to minimize the risks of a personal loan
- 5 questions to ask yourself before getting a personal loan
- Personal loan alternatives if you have bad credit
- Personal loan alternatives if you have good credit
- Frequently asked questions