Personal loans are one of the simplest forms of borrowing: you get a lump sum, pay it back in fixed monthly payments, and you're done. But are they a good idea? It depends.
What Is a Personal Loan?
A personal loan is an unsecured loan (no collateral required) with:
- Fixed rate
- Fixed monthly payments
- Set repayment term (usually 2-7 years)
- No restrictions on how you use the money
Pro Tip
Unlike a , personal loans have a defined end date. You know exactly when you'll be debt-free.
When Personal Loans Make Sense
1. Debt Consolidation
If you have high-interest debt, a personal loan at a lower rate can:
- Reduce your interest rate (24% credit card → 10% personal loan)
- Simplify multiple payments into one
- Create a clear payoff timeline
Real Example
Before: 3 credit cards at 24%, 22%, 20% = $500/month, years of payments After: One personal loan at 10% = $400/month, 36-month payoff
2. Major One-Time Expenses
- Emergency medical bills
- Major home repairs (if not eligible for HELOC)
- Moving costs
3. Large Necessary Purchases
When you need something significant and saving isn't an option:
- Essential appliances
- Professional certifications
- Starting a side business
When Personal Loans DON'T Make Sense
1. Discretionary Spending
Never borrow for:
- Vacations
- Weddings you can't afford
- Electronics or luxury items
- Lifestyle inflation
2. When You Have Better Options
- available
- 0% intro credit card offer
- Home equity loan at lower rates
3. If You Can Save Instead
If you can wait 6-12 months and save, do that instead of paying interest.
Personal Loan Rates: What to Expect
Your rate depends on:
- Credit score (biggest factor)
- Income and debt-to-income ratio
- Loan amount and term
- Lender (banks, credit unions, online lenders)
| Credit Score | Typical APR Range |
|---|---|
| 720+ (Excellent) | 7-12% |
| 690-719 (Good) | 12-17% |
| 630-689 (Fair) | 17-24% |
| Below 630 (Poor) | 24-36% |
Watch Out
If you're only offered rates above 20%, a personal loan probably isn't your best option. Focus on building credit first.
How to Get the Best Rate
1. Check Your Credit First
Get your free credit report. Fix any errors before applying.
2. Shop Multiple Lenders
- Banks and credit unions (often best rates for members)
- Online lenders (SoFi, Marcus, LightStream)
- Peer-to-peer platforms (Prosper, LendingClub)
3. Get Pre-Qualified
Many lenders offer soft-pull pre-qualification that doesn't affect your .
4. Consider a Co-Signer
If your credit is fair, a co-signer with excellent credit can lower your rate.
Watch Out For
Origination Fees
Some lenders charge 1-8% upfront. A $10,000 loan with 5% fee = only $9,500 received.
Prepayment Penalties
Avoid loans that penalize you for paying off early.
Variable Rates
Stick with fixed rates so your payment never increases.
Too-Long Terms
Longer terms mean lower payments but much more interest paid.
The Math: Should You Take the Loan?
Before borrowing, calculate:
- Total interest paid over the loan term
- Compare to alternatives (credit card rates, savings interest lost)
- Can you comfortably afford the payment? (Under 10% of take-home pay ideally)
Real Example
$10,000 loan at 10% for 3 years:
- Monthly payment: $323
- Total interest: $1,616
- Total repaid: $11,616
Same loan for 5 years:
- Monthly payment: $212
- Total interest: $2,748
- Total repaid: $12,748
The 5-year loan costs $1,132 more in interest.
The Bottom Line
Personal loans are tools—not inherently good or bad. Use them for consolidating high-interest debt or true emergencies. Avoid them for wants and discretionary spending. Always compare rates and read the fine print.