How to Decide if a Personal Loan Is Right for You

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Reviewed byAlvin Yam, CFP
Contributions by3 experts
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Reviewed byAlvin Yam, CFP
Edited byCasie McCoskey
Contributions by3 experts
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Updated: March 12, 2024

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Imagine facing unexpected medical bills or needing to consolidate high-interest credit card debts into one manageable payment. In these situations, a personal loan might be a viable solution. These loans provide a lump sum of money you repay over a set period with interest and can be either secured (requiring collateral) or unsecured (based on creditworthiness alone).

While they offer benefits like debt consolidation and quick access to funds, personal loans also carry risks, including the possibility of accruing additional debt and incurring interest charges. MoneyGeek's guide delves into the benefits, risks and other considerations of personal loans to help you determine if they are right for you.

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Personal loans have become a popular financial solution for many Americans, offering a way to bridge gaps in their budget, consolidate debt or finance large purchases. However, they can lead to debt if not budgeted for and considered carefully. TransUnion supplies us with these personal loan facts:

  • As of 2023, the average individual personal loan balance in the U.S. is $11,692.
  • 23.2 million Americans have unsecured personal loans.
  • The total outstanding debt of unsecured personal loans is $241 billion.

6 Reasons Why People Take Out Personal Loan

People often take out personal loans for a variety of reasons, primarily to manage their finances more effectively or to address specific financial needs. These loans offer flexibility and can be tailored to meet individual circumstances, making them an attractive option for many borrowers. Below, we explored six common reasons why people opt for personal loans:

Paying Off High-Interest Debts

Consolidating multiple high-interest debts into one personal loan can reduce the overall interest rate and monthly payments, making it easier to manage finances. This strategy simplifies the repayment process by having a single lender and a clear timeline for debt elimination. It can be particularly beneficial for credit card debt, which often carries higher interest rates than personal loans.

Making Home Improvements

A personal loan provides immediate funding for home renovations or repairs, which can increase the property's value and enhance living conditions. Unlike home equity loans, personal loans don't require using your home as collateral, offering a safer option for those who prefer not to risk their assets. Fixed interest rates and repayment terms help homeowners plan their finances without unexpected changes.

Financing Major Purchases

Personal loans offer a way to cover costs without depleting savings when making significant purchases, such as appliances or furniture. This method allows for fixed monthly payments, making budgeting easier. It's an alternative to using high-interest credit cards, potentially saving money on interest over time.

Covering Emergency Costs

Personal loans can be a financial lifeline in emergencies, providing quick access to funds for unexpected expenses like medical bills or urgent car repairs. They offer a structured repayment plan, which can ease the stress of handling sudden financial burdens. This option is handy when savings are not sufficient to cover the costs.

Undergoing a Major Life Change

Life events such as weddings, moving or starting a new job can come with substantial expenses. A personal loan can help spread these costs over time, making them more manageable within a budget. This financial tool allows individuals to enjoy these significant moments without the immediate financial strain.

Improving Credit Scores

Using a personal loan responsibly can aid in building a positive credit history by adding to the mix of credit types and demonstrating consistent, on-time payments. This can be especially helpful for individuals looking to improve or establish credit. Over time, this responsible use can lead to better loan terms and lower interest rates on future borrowing.

Different Types of Personal Loans

Personal loans come in various types to meet borrowers' diverse needs and circumstances. Understanding them can help you find the most beneficial terms and conditions for your specific situation.

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    Unsecured Personal Loans

    These loans are based on a borrower's creditworthiness without requiring collateral, such as a car or savings account. They are a popular choice for those who need funds without the risk of losing personal assets. However, they often come with higher interest rates due to the increased risk to the lender.

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    Secured Personal Loans

    By requiring collateral, secured loans reduce the risk for lenders, often leading to lower interest rates for borrowers. This type of loan is ideal for those with valuable assets who seek better loan terms. It's worth noting, however, that if you don't repay the loan, your lender can take possession of the collateral.

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    Fixed-Rate Personal Loans

    The interest rate remains the same throughout the life of the loan, offering financial predictability. Borrowers benefit from knowing exactly how much they need to pay each month, which aids in budgeting. Fixed-rate personal loans are especially appealing during periods of low interest rates.

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    Variable-Rate Personal Loans

    These loans have interest rates that can change over time based on market conditions. While there's potential for lower initial rates, there's also the risk of rates increasing. As such, they are best suited for those who can manage the uncertainty and potentially capitalize on lower rates.

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    Debt Consolidation Loans

    Specifically designed to pay off multiple debts, debt consolidation loans can streamline finances into one manageable payment. They not only simplify the repayment process but can also offer a lower overall interest rate. This option is an effective strategy for those looking to get out of debt more quickly.

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    Co-Signer Loans

    A co-signer can help a borrower qualify for a loan or secure a better interest rate than they might on their own. This is particularly beneficial for borrowers with poor credit or those building credit. That said, the co-signer does assume risk, as they're responsible for the loan if the primary borrower fails to pay.

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    Personal Lines of Credit

    Offering a flexible borrowing option, personal lines of credit allow individuals to draw funds up to a certain limit as needed. Interest is only paid on the amount borrowed during the draw period, making it a cost-effective option for ongoing expenses. This type of loan is ideal for those with fluctuating or unpredictable financial needs.

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    Payday Loans

    These unsecured loans are short-term and are usually in small amounts. They involve borrowing against a future paycheck, so repayment is typically due in full on the borrower's next payday. The interest rates on payday loans are incredibly high, meaning there's usually a better option for consumers.

Benefits and Risks of Personal Loans

Personal loans come with benefits and risks that can significantly impact your finances. Before applying for one, understand both sides to ensure you make an informed financial decision.

Benefits of Personal Loans


You can use personal loans for a variety of purposes. Personal loans can adapt to diverse financial needs, whether it's consolidating credit card debt, financing a wedding or covering unexpected medical bills. This flexibility means you can tailor their loan to your situation, making personal loans a versatile financial tool for various life events and financial strategies.

Lower Interest Rates

Personal loans often come with lower interest rates than credit cards. According to Federal Reserve data, the average interest rate for a 24-month personal loan is 12.35%, while credit cards have an average interest rate of 22.75% as of November 2023. With a personal loan, you can qualify for even lower rates based on your creditworthiness.

No Collateral

Unsecured personal loans don't require collateral, making them accessible to those who may not have assets to secure a loan. This feature removes the risk of losing personal property and opens up borrowing opportunities to a broader audience.

Quick Access to Funds

Many personal loans feature fast approval processes, with some lenders offering same-day funding. This quick access helps cover urgent financial needs. For example, if a borrower suddenly needs to replace a broken furnace in winter or cover an emergency medical bill, a personal loan can provide the necessary funds quickly without the lengthy wait times associated with other types of financing.

Easy Application

The process for applying for personal loans has been dramatically simplified, with many lenders offering online applications that you can complete in just a few minutes. This ease of application means that borrowers can apply from anywhere without needing to visit a bank in person. It reduces the hassle and time involved in securing funds.

Easy to Manage

Personal loans come with a clear repayment plan featuring fixed interest rates and monthly payments. This structure simplifies your budgeting, as you know exactly how much to set aside for loan repayment each month.

Risks of Personal Loans

Potentially Higher Interest Charges

Certain personal loans, particularly those without collateral, often carry higher interest rates, escalating the total cost of borrowing. Such rates mean that over the loan's life, a borrower might pay a substantial amount over the principal borrowed. This scenario becomes particularly impactful for long-term loans or borrowers with less-than-ideal credit scores, where the interest rate is even higher, significantly increasing the financial burden over time.

Fees and Penalties

Many personal loans come with various fees, such as origination fees or charges for late payments, which can increase the cost of borrowing. These fees can make a significant difference in the overall expense of the loan. For instance, an origination fee can reduce the amount of money you receive from the loan, while late fees can add up, further straining your budget if you miss payments. Many personal loans charge origination fees of 1% to 5% of the loan amount and late fees of up to $50.

Eligibility Requirements

The criteria to qualify for personal loans can be strict, requiring good to excellent credit scores. This can limit access for those with low credit scores, forcing them to seek higher-interest loans. Good to excellent credit (typically 670+ FICO) is usually required to qualify for the best personal loan rates.

Unnecessary Debt

Borrowing through personal loans for non-critical expenses can lead to excessive debt, complicating financial situations. For example, financing a lavish event or high-end purchase can stretch budgets thin and divert funds from crucial savings or debt payments.

Credit Impact

Failing to meet personal loan repayments can lead to adverse reports on your credit history, significantly lowering your credit score. This decrease can hinder your ability to secure future financing, affecting terms and accessibility. Additionally, each loan application can result in a hard credit inquiry, temporarily reducing your credit score, emphasizing the importance of managing loan obligations carefully to maintain or improve credit health.

Considerations Before Getting a Personal Loan

Before deciding on a personal loan, it's helpful to take a close look at your current financial situation and budget. This review is key to understanding whether you're in a good position to manage an additional loan and how it fits into your financial goals. You can do this by asking yourself the following questions:

What is your credit score?

Your credit score is a critical factor in determining loan eligibility and interest rates. A higher score can unlock lower rates and better terms, directly influencing the affordability of the loan. Understanding your credit score beforehand allows you to estimate the loan's cost and possibly improve your score before applying.

Where will you use the loan?

Identifying the specific use for the loan helps ensure that the borrowing aligns with your financial goals, whether it's consolidating debt, financing a large purchase or covering unexpected expenses. This clarity can prevent misusing the loan on non-essential expenses, ensuring that the debt taken on serves a purposeful and beneficial role in your financial plan.

How much can you afford to pay monthly?

Evaluating your budget to determine how much you can comfortably afford in monthly payments assists you in maintaining your financial balance. It helps you select a loan amount and term that won't overburden your finances, ensuring that the loan improves rather than worsens your financial situation.

What is the interest rate?

The interest rate directly affects the total repayment amount of the loan. Comparing rates from different lenders can lead to significant savings over the loan's life. Understanding this aspect helps you choose a cost-effective loan that suits your financial capacity.

What type of personal loan is right for you?

Considering the different types of personal loans available allows you to choose one that best matches your risk tolerance, financial status and needs. Whether it's a secured or unsecured loan or a fixed or variable interest rate, understanding the nuances of each can guide you to the most suitable loan option.


APR (annual percentage rate) reflects the total cost of borrowing over the loan's lifetime, which factors in both interest and applicable fees. It provides a clearer picture of the actual cost than just looking at interest rates alone.

For example, two loans may have different stated interest rates but end up costing roughly the same when you include fees. This is why comparing only interest rates can give a false sense of which loan is cheaper. — Alvin Yam, CFP®

How to Choose the Best Personal Loan

Personal loans come with varied terms and conditions across different lenders, affecting everything from interest rates to repayment schedules. Examine these differences to secure a loan that meets your financial requirements and aligns with your ability to repay. Consider following these strategies:

Learn the eligibility requirements

Some lenders specialize in working with borrowers with low credit scores, offering a pathway to financing that might otherwise be unavailable. Others, meanwhile, cater exclusively to those with good to excellent credit, often providing lower interest rates and more favorable terms. Knowing where you stand credit-wise can help you target applications toward lenders who are more likely to approve your loan, saving time and potential hits to your credit score from multiple inquiries.

Compare interest rates

Interest rates for personal loans can vary widely, with some lenders offering lower minimum rates for borrowers with excellent credit. Others may have higher maximum rates for those with low credit scores. By examining the interest rates, you can choose a lender that offers the most advantageous terms for your financial situation.

Determine the borrowing amount range

Lenders have varying minimum and maximum loan amounts, so finding one that matches the exact sum you require ensures you don't borrow too little for your needs or too much, potentially leading to unnecessary debt. For instance, if you need $15,000 for a home renovation, choosing a lender that offers loans up to $20,000 rather than one with a maximum of $10,000 ensures you can cover your costs.

Look at term length options

Some personal loans come with longer repayment terms, which can significantly affect your financial planning. Longer terms might lower your monthly payment but could result in paying more interest over the life of the loan. Conversely, shorter terms increase monthly payments but decrease the total interest paid, making it beneficial to choose a term that effectively balances your monthly budget and overall interest costs. Most personal loans have terms between two to five years.

Review fees and penalties

Some lenders may impose higher fees for processing applications, late payments or early repayment, which can increase the cost of your loan. In contrast, other lenders might not charge any fees, offering a more cost-effective borrowing option. Knowing these potential costs upfront allows you to select a loan that minimizes additional expenses.

Check the funding time

Checking the funding time is key, especially for urgent financial needs. While some lenders may take days or weeks to process and disburse funds, others offer same-day funding options. This means you could apply for a loan and access the funds on the same day, which may be helpful if you need to meet immediate financial obligations.


Some lenders offer the option to prequalify for personal loans, a process that allows you to see potential loan terms without impacting your credit score. Prequalification provides a preliminary look at the interest rates, loan amounts and repayment terms you might qualify for based on a soft credit check. This can help you gauge whether a personal loan meets your financial needs and circumstances before committing to a full application.

Who Should Get a Personal Loan

While personal loans can be beneficial, they're not suitable for everyone. Understanding when a personal loan makes sense and when another option may be best will help you make a decision that supports your financial well-being.

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    You want to consolidate debt

    If you're juggling multiple debts with high interest rates, such as credit card balances, a personal loan can help consolidate these into a single, lower-interest loan. This consolidation simplifies your payments and can reduce the interest you pay over time, making it easier to manage your finances and potentially saving you money.

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    You have a home renovation project

    Home improvements can increase the value of your home but often come with significant costs. A personal loan can provide the funds for renovations without tapping into home equity, preserving it for future needs. This option is especially useful for non-homeowners or those without enough equity. The fixed repayment term also allows for predictable budgeting.

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    You are about to undergo a major life event

    Significant events, like weddings or milestone celebrations, can come with hefty price tags. A personal loan can cover these costs, allowing you to spread out payments over time instead of depleting your savings or relying on high-interest credit cards. This way, you can enjoy your special occasion without the financial stress of immediate repayment.

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    You need to cover medical expenses

    Medical emergencies or necessary treatments can result in substantial financial burdens. A personal loan can provide a manageable way to pay for medical expenses, offering a structured repayment plan that can fit within your budget. This alternative helps avoid the pitfalls of accumulating high-interest debt on credit cards, making it a sensible choice for managing health care costs effectively.

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    You need funds for an emergency

    Life can bring unforeseen expenses, such as urgent car repairs or immediate travel needs. In these situations, a personal loan can offer a quick financial lifeline. Unlike credit cards, personal loans provide a structured repayment plan, helping you manage the debt more effectively without falling into a high-interest trap.

When to Avoid Personal Loans

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    You don't have a clear purpose

    Taking out a loan without a specific goal can lead to frivolous spending and unnecessary debt accumulation. A personal loan should serve a well-defined financial need, such as debt consolidation, home improvements or covering significant life events. Without a clear purpose, you risk taking on debt that doesn't improve your financial situation and paying interest on expenses that might not be worthwhile.

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    You can't afford the loan

    Before applying for a personal loan, assess your financial situation and ensure you can comfortably make the monthly payments throughout the loan term. If your budget is already stretched thin or if the loan payments would put you in financial jeopardy, it's wise to reconsider.

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    You have other options

    If there are more cost-effective or less risky ways to meet your financial needs, exploring those before committing to a personal loan is advisable. For example, if you're looking to consolidate debt, a balance transfer credit card with a 0% introductory APR might be a better option if you can pay off the balance before the promotional period ends.

Alternative Ways to Borrow Money

Exploring other ways to borrow money is wise for anyone looking to manage their finances effectively. Personal loans are a popular option for obtaining funds, but other routes are available. By considering other avenues, you can make informed decisions that align with your financial situation and goals.

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    Credit Cards

    Credit cards offer a convenient way to access funds, especially for short-term needs or smaller expenses. They come with the flexibility of borrowing up to a certain limit as needed. One advantage over personal loans is the potential for lower interest rates through promotional offers, such as 0% APR for an introductory period. However, wisely managing credit card use is important to avoid high interest rates after promotional periods end.

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    Home Equity Loan

    A home equity loan allows homeowners to borrow against the equity in their home. This option can provide a larger loan amount at lower interest rates than unsecured personal loans, making it a cost-effective choice for significant expenses like home renovations. The loan is secured by your home, which typically results in more favorable terms. However, the risk involves the potential for foreclosure if you're unable to repay the loan.

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    HELOC (Home Equity Line of Credit)

    Similar to a home equity loan, a HELOC provides access to funds by borrowing against the equity in your home. The difference lies in its flexibility; a HELOC works like a credit card, allowing you to draw funds as needed up to a credit limit. This makes it an excellent option for ongoing projects or expenses. Interest rates are usually competitive, but as with home equity loans, your home serves as collateral. The risk involves the potential for foreclosure if you're unable to repay the loan.

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    401(k) Loan

    Borrowing from your 401(k) retirement plan is another alternative. This option allows you to borrow against your retirement savings without a credit check, and the interest you pay goes back into your account. It's a convenient choice if your plan allows it and you want to avoid hurting your credit score. However, be sure to consider the potential impact on your retirement savings growth and the penalties for not repaying the loan according to the plan's terms.

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    Life Insurance Policy Loan

    If you have a whole life insurance policy with cash value, you can borrow against it. This loan doesn't require credit checks, and repayment terms can be flexible. One significant advantage is that interest rates are typically lower than personal loans. However, any outstanding loan amount and interest are deducted from the beneficiary payout upon death.


Payday and title loans are short-term borrowing options that provide quick cash to borrowers. A payday loan is secured against the borrower's next paycheck, while a title loan uses the borrower's vehicle title as collateral. We generally advise borrowers against using these loans due to their exorbitant rates and the potential for a cycle of debt.

Expert Insight on Determining if a Personal Loan Is the Right Option

There are many factors and concepts to consider when learning about personal loans. MoneyGeek spoke with industry leaders for their expert insights to help you determine whether a personal loan is the right option for you.

  1. What do you think is the most important thing people need to know when it comes to personal loans?
  2. Do you have any tips to help people properly manage their personal loans?
Jake Hill
Jake HillCEO of DebtHammer
Todd Christensen
Todd ChristensenAccredited Financial Counselor and Education Manager at Money Fit by Debt Reduction Services, Inc.
Dana Sitar
Dana SitarCertified Educator in Personal Finance and Owner & Executive Director at Healthy Rich

FAQ About Personal Loans

We compiled a list of frequently asked questions to help navigate the complexities of personal loans, making it easier for you to decide whether this option is right for you and how to proceed if it is.

How do I qualify for a personal loan?
What can I use a personal loan for?
How much can I borrow with a personal loan?
What are the interest rates for personal loans?
Are there fees associated with personal loans?
How long are the repayment terms for personal loans?
Can I pay off my personal loan early?
What happens if I miss a payment on my personal loan?
How does a personal loan affect my credit score?

Resources on Personal Loans and Other Options

Finding in-depth and reputable resources can help you better understand loans, borrowing options and their guidelines, benefits and risks. Explore the following resources to expand your knowledge and help you make wise financial decisions.

  • Banks: Your financial institution can be a good place to start when exploring your financial options. You can talk to a representative to learn about their loan opportunities, terms, fees and interest rates.
  • Federal Student Aid: This data center can help you find information about federal financial assistance programs specifically made for students or students’ families.
  • Federal Trade Commission (FTC): Learn more about your consumer rights and how to report fraud or similar criminal activities. You can also get information about different types of loans.
  • This is an online resource to help individuals looking for government loans. Find loans you are eligible for in a variety of categories.
  • Kabbage: This online financial technology company helps small businesses get direct funding through an automated lending platform.
  • Use the credit union locator to find a credit union near you. You can also access free financial calculators and explore relevant publications and articles.
  • National Association of Student Financial Aid Administrators: Get access to different financial aid resources for students. You can find data on the state level or national level and about post-secondary research organizations.
  • Personal Loans USA: This company connects borrowers to lenders. You only need to submit a loan request and wait for lenders to contact you.
  • Prosper: If you are looking for peer-to-peer lending, Prosper is the right place. It is a marketplace where people can invest in each other.
  • Small Business Administration: SBA can help you get a loan for your small business by setting guidelines for loans made by partnering lenders, community development organizations and micro-lending institutions.
  • Learn more about different government programs to help people in need of financial assistance. You can search for available government grants and loans, as well as the requirements.
  • U.S. Department of Housing and Urban Development: Learn more about Federal Housing Administration (FHA) loans. This is best for people buying their first home or those looking for apartments.
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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.