The PROs and CONs of Personal Loans. Detailed look at all the factors of a personal loan. We give you all the details so you can be informed. We want you to make the right choice for you.
Personal loans can be a great financial tool for those in need of quick funding. They offer flexibility, a straightforward application process, and a predictable repayment schedule. However, like any financial product, they come with their own set of advantages and disadvantages. I’m going to break down the key pros and cons of personal loans to help you decide if they’re the right option for your financial needs.
We’ve spent years in the lending industry where we studied how people use personal loans, when they get into trouble with them, and when they solve their problems. We also track dozens of lenders, so we understand the policies, risks, and benefits.
Pros of Personal Loans
Lump Sum Payment
One of the main benefits of a personal loan is the lump sum payment you receive upfront. Whether you’re using the loan to consolidate debt, pay for home improvements, or cover an emergency expense, you get the full amount at once, which gives you flexibility in managing your finances.
Few Restrictions
Once you get that lump sum, there are very few restrictions of what you can use the money for. Some lenders might specify that you can’t use the funds for student debt or for for personal businesses, but most do not mention any limitations. You can use the money for nearly any purpose—be it for debt consolidation, home renovations, life events like a wedding, moving, or having a baby, or even a vacation. This makes personal loans highly versatile compared to other types of financing.
Fast Funding
Personal loans are typically processed quickly, especially with online lenders. Many lenders can give you a decision within a minute sending in your application. For smaller loans, they can fund your loan by the next business day. For much larger loans, say over $30,000, the process might take an extra day or two. But in this day and age, it’s rare to have to wait more than a couple of days to complete the process. This speed makes personal loans an appealing choice if you need funds urgently, such as for medical expenses or unexpected motor vehicle repairs.
Fixed Interest Rate
Most personal loans come with a fixed interest rate, meaning your rate won’t change over the course of the loan term. Interest rates on credit cards and home equity lines of credit usually float based on the Fed’s prime interest rate. It doesn’t matter what happens in the broader economy if you’ve taken out a personal loan. Your interest rate will be fixed. This leads into the next pro.
Fixed Payment Amount
Personal loans are amortized. That’s a fancy word that just means that the monthly payment will be exactly the same from the first month to the last month. At the beginning of the loan, you will know exactly how long the debt will last, how much total interest you will end up paying, and and what you’ll have to budget for every single month.
Boost Your Credit Score
There are a couple of different ways that a personal loan could boost your credit score. The most reliable one is if you make all of your payments on time. On-time payments is the single most important factor in a strong credit score. Successfully managing a personal loan demonstrates to lenders that you’re financially responsible, which can positively impact your credit history and increase your chances of being approved for future loans or credit cards. Personal loans can also diversify your type of credit, which also can have a positive impact on your credit score. Of course, never take a loan for the purpose of boosting your credit score. But if you are taking a loan anyway, that could be a side-benefit.
No Collateral Required
Personal loans are usually unsecured, meaning you don’t have to put up any collateral (like the equity in your home or the title to your motor vehicle) to obtain the loan. This makes them less risky for borrowers compared to secured loans. If you struggle to repay an unsecured personal loan, the lender cannot seize your assets.
Cons of Personal Loans
Fixed Payment
I know I mentioned that one of the benefits of a personal loan is the fact that it has a fixed payment, but that can also be a con. While a fixed payment schedule provides predictability, it can also be restrictive. Your monthly payments are set from the outset, regardless of changes to your income or financial situation. If you experience financial difficulty, you don’t have the flexibility to change how much you pay.
Fixed Term
That unyielding consistent payment means that there is also an unyielding term. Your payment term will be established when you take out the loan. Personal loan terms usually range from 1 to 7 years. The only way to extend that term is to refinance…which isn’t really extending the loan as taking out a whole new one.
Not Revolving
Unlike credit cards or lines of credit, personal loans are non-revolving. This means you can’t borrow more money once you’ve paid off part of the loan—once the funds are used, they’re gone. If you need additional funds, you would have to apply for a new loan which could mean being denied, being offered a different interest rate, or incurring new fees.
Shorter Repayment Terms
Personal loans often come with shorter repayment terms compared to other types of loans, such as mortgages or home equity loans. While this can be an advantage in terms of paying off the loan more quickly, it also means higher monthly payments. This may put strain on your budget, especially if the loan amount is large. Obviously, we always want to get out of debt as soon as possible, but for especially large loans, shorter terms could mean added strain on your monthly budget.
Rates May Rise with Longer Terms
While personal loans generally offer fixed interest rates, the rates can be higher for loans with longer terms. If you opt for a loan with a longer repayment period, you might end up paying more in interest over the life of the loan, especially if your credit score is less than stellar. The reason for this is because the lender might decide that the longer term means more time that something could go wrong in your finances. They price the loan to compensate for the chance of default throughout the life of the loan.
Missing Payments Can Hurt Your Credit Score
One of the biggest drawbacks of personal loans is that missed or late payments can have a serious negative impact on your credit score. Payment history is the most important factor in your credit score. Being reported 30-days past due on a payment will give your credit score a significant hit.
May Require Strong Credit
While personal loans are available to a wide range of borrowers, those with stronger credit are more likely to be approved for the best rates. If your credit score is low, you may either be denied a personal loan or offered one with higher interest rates, which could make the loan less affordable.
Making a Decision on a Personal Loan
One of the most important factors of whether a personal loan would be a good decision for you will be the offer a lender gives you. If you are only offered loans with high APRs and high fees on amounts that don’t solve your financial problem, a personal loan may be a poor decision. So, as you are deciding whether you need a personal loan, you should always shop around. If you can, you should try and get two or three offers in hand before you make a decision. That will ensure you are getting the best deal you can in your situation.
At The Yukon Project, we’ve tried to make shopping around for a personal loan easy. If you visit our marketplace page, you can apply to any one of our featured lenders. Behind the scenes, we will check your rate with up to forty lenders. Our partners use a soft credit check, so applying won’t hurt your credit score. We will show you all of your approved offers so you can feel confident that you are picking the best loan for you.
Personal loans have several pros and cons. You will want to make sure you understand how a personal loan would impact your life and your finances before you accept one. Carefully consider your financial situation and see if there are ways you accomplish what you want to do without taking on debt. At The Yukon Project, we want you to live the best financial life that you can. If you found this information useful, please like this video and subscribe to our channel. Your support really helps us out and we appreciate it. Thanks for watching.
offer a range of benefits, including lump sum payouts, fast funding, and fixed payments, making them an attractive option for many borrowers. They are flexible and unsecured, which adds to their appeal. However, they also come with certain downsides, such as fixed terms, a lack of flexibility once the loan is disbursed, and potential impacts on your credit score if payments are missed.
Before applying for a personal loan, it’s important to carefully consider your financial situation and whether you can comfortably meet the repayment terms. If used responsibly, a personal loan can be a helpful tool for managing large expenses or consolidating debt, but it’s crucial to weigh the pros and cons to ensure it’s the right financial decision for you.
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