Should I Get a Personal Loan?

Consider a personal loan if you’re consolidating debt or need to fund a large expense like a home remodel.
Ronita Choudhuri-Wade
Jackie Veling
By Jackie Veling and  Ronita Choudhuri-Wade 
Updated
Edited by Kim Lowe

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A personal loan is a way to consolidate high-interest debt or finance a large expense like a home improvement project. Interest rates on personal loans can be lower than on some credit cards, especially if you have good credit.

But financial experts typically advise against using a personal loan for that beach vacation or the latest flatscreen TV. For discretionary purchases like these, paying with cheaper options like a 0%-interest credit card or money you’ve saved up is best.

What is a personal loan?

Personal loans are a type of credit that consumers can use for almost any reason. Unlike mortgages or auto loans, personal loans don’t need to be earmarked for a specific purpose.

Personal loans are installment loans; if approved, you’ll receive a lump sum of cash that you repay in fixed amounts every month until the loan term expires.

To determine your eligibility, a lender will check your credit and income to gauge your ability to repay the loan. Applicants with high credit scores, strong income and low debt usually receive the lowest rates.

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When is a personal loan a good idea?

A personal loan can be a good idea when:

  • You need the funds fast.

  • It is the financing option with the lowest rate.

  • You can comfortably afford the monthly payments for the loan term.  

Here are common reasons to take out a personal loan:

Consolidate high-interest debt

Getting a personal loan is one way to consolidate high-interest debt, like credit card debt, into a single payment. Ideally, the personal loan has a lower interest rate than your existing debt, allowing you to pay it off faster.

For example, a borrower with good credit has two credit cards with individual balances of $10,000 and each card has an interest rate of 24.99%. Every month they make $400 monthly payments toward each card. By rolling those debts into a single personal loan with an interest rate of 18% paid over three years, the borrower could save $2,770, according to NerdWallet’s debt consolidation calculator.

Home improvement

Using a personal loan for a home improvement project can make sense, especially if the project adds value to your home. You avoid racking up credit card debt or having to pledge your house as an asset, like with a home equity loan.

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

When do personal loans not make sense?

A personal loan isn’t a good solution if:

  • You have time to grow your savings and cover your expense in cash.

  • You can get a lower rate elsewhere. 

  • You can’t afford the monthly payments for the loan term. 

Here are situations where a personal loan may not make sense:

Discretionary spending

Personal loans are an expensive financing option for nonessential expenses, like an extravagant wedding or a dream vacation. Instead, start saving now for big-ticket items to avoid finance charges altogether.

Medical costs

Medical bills can often be paid through a lower-cost payment plan with a doctor or medical credit card rather than a personal loan. Consider a personal loan only if you can’t get better terms.

Emergency expenses

Rainy-day or emergency funds are often the best courses of action for emergency expenses. Personal loans may seem far cheaper and less risky than other sources like payday loans, but they can still involve high interest rates, especially for borrowers with poor credit.

Pros and cons of personal loans

Pros of a personal loan

Cons of a personal loan

  • Fixed monthly payments.

  • Loan amounts can range from $1,000 to $100,000.

  • You can use it for nearly any purpose.

  • APRs can be lower than credit cards.

  • Loans may come with an origination fee.

  • You may have cheaper alternatives.

  • Increases your monthly debt obligation.

Pros

Fixed monthly payments. Personal loans have a fixed rate and monthly payments for the loan term. This makes the payments easier to plan for in your monthly budget than credit card payments, which fluctuate. A personal loan also gives you a clear payoff date for the debt.

Loan amounts range from $1,000 to $100,000. Because personal loans can have a wide range of amounts, they can help you pay for a minor home repair or consolidate larger debts. However, loan amounts differ by lender and creditworthiness.

You can use it for nearly any purpose. Unlike mortgages and auto loans, which are used for specific purchases, personal loans can be used to pay for almost anything. Lenders will ask for your loan purpose on the application, but your reason is unlikely to disqualify you.

APRs can be lower than credit cards. Borrowers with good to excellent credit (score of 690 or higher) will likely get the lowest rates on personal loans, often much lower than credit cards.

Cons

Loans may come with an origination fee. Some lenders charge an origination fee, a percentage of your loan amount typically deducted before you get the funds.

There may be cheaper alternatives. If you have fair to bad credit (score of 689 or lower), qualifying for the lowest interest rates on a personal loan can be difficult. Consider alternatives like a 0% credit card, a family loan or equity financing for a home improvement project that can save you money on interest.

Increases your monthly debt obligation. A personal loan increases your debt-to-income ratio, which may make it difficult to qualify for other loans and credit cards during the loan term.

How to get a personal loan

Check your credit score. Getting a personal loan starts with checking your credit score. Your credit score will help you determine which lenders you may qualify with. Review your credit report and fix any issues that may be hampering your score.

Pre-qualify. Determine how much you need to borrow and calculate estimated rates so you have all the information you need to pre-qualify. Pre-qualifying requires a soft credit check — which won’t impact your score — and allows you to review potential offers from lenders. Compare the potential rates and terms between online lenders, banks and credit unions.

Compare financing options. Next, consider other credit options like 0%-interest credit cards, secured loans or adding a co-signer. Before committing, read the fine print to see if there are any fees, and learn more about features the lender offers, like direct payment to creditors or flexible payment dates.

Submit your application. If you decide to move forward, gather the required documents so you are ready to apply for the loan formally.

Personal loans from our partners

SoFi logo
Check Rate

on SoFi

SoFi

5.0

NerdWallet rating 
SoFi logo

5.0

NerdWallet rating 
APR 

8.99- 29.99%

Loan amount 

$5K- $100K

Check Rate

on SoFi

Avant logo
Check Rate

on Avant

Avant

4.0

NerdWallet rating 
Avant logo

4.0

NerdWallet rating 
APR 

9.95- 35.99%

Loan amount 

$2K- $35K

Check Rate

on Avant

BestEgg logo
Check Rate

on Best Egg

Best Egg

4.5

NerdWallet rating 
BestEgg logo

4.5

NerdWallet rating 
APR 

8.99- 35.99%

Loan amount 

$2K- $50K

Check Rate

on Best Egg

Discover logo
Check Rate

on Discover

Discover

5.0

NerdWallet rating 
Discover logo

5.0

NerdWallet rating 
APR 

7.99- 24.99%

Loan amount 

$2.5K- $40K

Check Rate

on Discover

Happy Money logo
Check Rate

on Happy Money

Happy Money

4.5

NerdWallet rating 
Happy Money logo

4.5

NerdWallet rating 
APR 

11.72- 17.99%

Loan amount 

$5K- $40K

Check Rate

on Happy Money

Upgrade logo
Check Rate

on Upgrade

Upgrade

5.0

NerdWallet rating 
Upgrade logo

5.0

NerdWallet rating 
APR 

8.49- 35.99%

Loan amount 

$1K- $50K

Check Rate

on Upgrade

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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