The pros and cons of personal loans: what to consider

A personal loan is a type of installment loan that can help you pay for various expenses. People often use them for big purchases, consolidating credit card debt at a lower interest rate, or covering home improvements. One big perk is that they provide quick cash in an emergency.

Before deciding if a personal loan is right for you, let’s review the pros, cons, and other important factors to consider.

Personal loan pros and cons

Before we dive into the advantages and disadvantages of a personal loan, here’s a quick overview.

Personal loan advantages

Compared to credit cards, home equity loans, personal lines of credit, and short-term loans, there are several unique advantages to personal loans. Let’s take a closer look.

1. Consistent monthly payments

Unlike credit cards or other revolving credit lines, personal loans usually have a fixed interest rate. This means the rate you lock in when approved won’t change throughout the loan term. Since your interest rate stays the same, your monthly payments remain steady, making it easier to budget because you’ll always know what to expect.

2. Wide variety of uses

Another benefit of a personal loan is how many ways you can use the funds. In other words, your lender won’t restrict how you spend the lump sum, making it a more flexible choice than loans like auto loans. However, there are some limitations, such as not using the money for college tuition or anything illegal.

Personal loans can be used for:

• Home improvements
• Emergency costs
• Consolidating debt
• Wedding expenses
• Big purchases
• Credit card debt consolidation

However, just because you can use a personal loan for almost anything doesn’t mean you should. They’re usually a good option when you know exactly how much money you need to borrow and feel confident you can handle the monthly payments.

3. Competitive interest rates

A personal loan can have a lower interest rate if you have a good credit score and get approved. Other financing options, like credit cards, payday loans, and title loans, often have much higher rates, making borrowing more expensive.

A lower interest rate means you’ll pay less in interest over the life of the loan, helping you save money. It can also make monthly payments more manageable, giving you a more affordable way to borrow than high-interest alternatives.

For instance, according to the Federal Reserve, the average annual percentage rate (APR) for a 24-month personal loan was 11.66% in February 2025, while the average APR for a credit card was 21.91%.

4. Low chance of needing collateral

Personal loans can be either secured or unsecured. With a secured loan, you’d need to offer collateral, like your home or car, to back the loan. But unsecured personal loans, which don’t require any collateral, are much more common. This makes them an appealing choice compared to secured loans like home equity loans or home equity lines of credit (HELOCs). It’s a simple, straightforward way to borrow without the extra risk.

5. Longer loan terms

Personal loans typically have repayment terms ranging from 12 to 60 months, though some lenders may offer more or less time based on your situation. On the other hand, short-term loans, like payday loans or title loans, usually only last a few weeks.

Since personal loans have a longer term, they give you more time to pay back the amount you borrowed. This flexibility can make a big difference when managing your budget, as it gives you more breathing room to make your monthly payments.

With a longer term, your monthly payments for a personal loan will be much smaller than paying off a short-term loan in full. This is because the loan amount is spread out over a longer period, making the payments more manageable.

6. Shorter funding time frame

The application process for a personal loan is usually quick. Some personal loan providers, like Rocket Loans^SM, even provide same-day funding for eligible borrowers. This makes personal loans a great choice when you need money fast, such as for an unexpected medical bill or a sudden car repair.

Personal loan disadvantages

It's easy to focus on the advantages of personal loans, but it's just as important to consider the downsides. Before deciding, let’s examine some potential disadvantages of taking out a personal loan.

1. Strict credit score requirements

Most lenders require a minimum credit score in the mid-600s, so a personal loan may not be ideal if your credit isn’t great. You might still qualify with a lower score if you choose a secured loan or apply with a co-signer. However, not all lenders offer co-signer loans or accept collateral, so options could be limited.

2. High interest rates

If your credit score is on the lower side but still qualifies for a personal loan, you might not get a good interest rate. Some personal loan rates can go as high as 36%, which means you could pay a lot in interest over time.

Because of this, some borrowers might benefit from improving their FICO® Score before applying. Others may find that a different financing option works better for their situation.

3. Increased debt obligations

Whenever you apply for a loan, lenders look at your debt-to-income ratio (DTI). This number compares your monthly debt payments to your income. The higher your DTI, the harder it can be to qualify for new loans in the future. 

For example, imagine you’re planning to buy a home, but you recently took out a personal loan. When you apply for a mortgage, the lender checks your DTI and finds that it’s over 43%. Since many mortgage lenders have strict DTI limits, your personal loan could hurt your chances of getting approved for a mortgage.

Taking on more debt now might make it harder to get approved for bigger loans down the road. That’s why it’s important to think ahead and consider how a personal loan might impact your future financial goals.

4. Extra fees and penalties

Even if you secure a low interest rate, a personal loan can still come with extra costs. Many lenders charge an origination fee, a one-time cost that helps cover the administrative work involved in processing your loan. This fee is usually a small percentage of the loan amount but can still add up.

Beyond that, if you miss a payment or don’t pay on time, your lender may charge a late payment fee, making your loan more expensive. Some lenders also have prepayment penalties, meaning you could be charged a fee if you pay off your loan early. This might seem unfair, but some lenders count on earning interest over the full loan term, so paying it off ahead of schedule could come with an extra cost.

5. Possible collateral requirement

If you’re considering a secured personal loan, be prepared to offer collateral to back it up. Collateral is something valuable that you agree to give the lender if you can’t repay the loan. Lenders accept a variety of assets as collateral, including cars, boats, certificates of deposit (CDs), or even a savings account.

While secured loans often come with lower interest rates, they also carry a big risk — if you fail to make payments, the lender has the right to take your collateral. That means you could lose your car, savings, or another valuable asset if you run into financial trouble.

6. Potential financial risks

Taking out a personal loan comes with financial responsibilities, and missing payments or paying late can hurt your credit score in multiple ways. Defaulting on the loan or not making payments could cause your credit score to drop significantly. Plus, the missed payments could stay on your credit report for up to 7 years. This can make qualifying for future loans, credit cards, or rental agreements harder. 

If have an unsecured personal loan, the lender might take legal action and ask a judge to order you to repay the debt. If you took out a secured loan, the stakes could be even higher — your lender could repossess the asset you used as collateral, whether a car, savings account or another valuable item. In either case, if you don’t pay, your lender might sell your debt to a collection agency.

FAQs about the pros and cons of getting a personal loan

If you're not sure if the advantages of a personal loan outweigh the downsides, reviewing some frequently asked questions can help you make a more informed decision.

How can I tell if a personal loan is right for me?

While personal loans can be helpful when you need quick funds for pressing expenses, they're not ideal for everyone. They make sense if you clearly understand how much you need to borrow and have confidence in your ability to make regular payments. But if money is already tight each month or you're uncertain about the amount you'll need, consider looking into alternative financing options.

What are the eligibility requirements for a personal loan?

Lenders generally look for a minimum credit score of around 650, along with a maximum debt-to-income ratio ranging from 36% to 50%. If these requirements seem out of reach, focusing on improving your credit score first could be helpful. With a stronger credit profile, you're more likely to receive approval and secure more favorable loan terms, including lower interest rates and extended repayment periods.

What should I consider before taking out a personal loan?

Here's what to consider before taking out a personal loan. Think through these key questions as you explore your options:

• Know your loan amount: Be clear about your borrowing needs. If you're uncertain about the exact amount you need upfront, a line of credit might be more suitable.
• Check your cash flow: Determine whether you can handle another regular payment. Running the numbers through a loan calculator will give you a realistic picture of the monthly costs.
• Assess your credit standing: Your credit score plays a big role in determining interest rates. Make sure your score will help you qualify for terms that work with your budget.
• Examine your spending patterns: If you plan to consolidate credit card debt, reflect on your financial habits first. Success with a personal loan often depends on developing solid budgeting skills and curbing impulse purchases.
• Consider your income stability: Personal loans require consistent payments over several years. If your income fluctuates due to seasonal work, self-employment, or commission-based pay, consider looking into more flexible financing options.

The bottom line: Smart borrowing requires careful planning

Personal loans can be a useful tool, but they come with both advantages and disadvantages. It’s critical to weigh these carefully before deciding if a personal loan is the right choice for you. Understanding the potential risks and rewards will help you make an informed decision.

If you’re ready to take the next step, apply for a personal loan with Rocket Loans.