Personal loans are a type of lending instrument offered through banks, credit unions, and online lenders. They’re paid back, with interest, in installments, and there are few limitations on how the loan funds can be used. They’re also typically unsecured, meaning you don’t have to put up any property as collateral for the loan.
A personal loan is an important financial tool if you can find one from a reputable lender at a reasonable interest rate, and you can commit to making loan payments on time. However, if you only qualify for a loan with a high interest rate or you feel you may have trouble paying it back, you may want to think twice before applying.
Table of Contents
Key Points
• Personal loans can be beneficial for consolidating high-interest debt or funding home improvements if you qualify for favorable rates.
• Downsides include fees, higher interest rates compared to secured loans, and the risk of increasing overall debt.
• No-credit-check loans are often predatory and can trap borrowers in cycles of debt due to extremely high interest rates.
• Taking out a personal loan for discretionary spending or investing is generally not a good idea due to financial risk.
• Before applying, compare alternatives such as home equity lines of credit (HELOCs) or 0% APR credit cards to determine an option that fits your needs.
Are Personal Loans Bad?
Not necessarily. There are both advantages and disadvantages to personal loans. Here’s a look at some of the benefits of taking out a personal loan:
• Personal loans generally offer a wide range of borrowing limits, typically between $1,000 and $100,000.
• There is flexibility in how the funds can be spent, unlike with a mortgage, which you must use to buy a house, or an auto loan, which must be used to purchase a car.
• Proceeds from personal loans can be used for a variety of purposes, from paying down credit card debt to making home improvements and more.
• Unsecured personal loans are offered by many lenders. There is no need to put any of your assets up as collateral for the loan, nor do you risk losing them should you default.
It’s important to weigh these benefits against potential disadvantages and determine whether it’s bad to get a personal loan for your financial needs. Here’s a look at some of the downsides of taking out a personal loan:
• Personal loans may not offer the lowest-cost borrowing option. For example, you might be able to get a better rate on a home equity loan or a HELOC if you have enough equity in your home. That said, both of those lending instruments use your house as collateral, so if you default, you could risk losing your home.
• Personal loans sometimes have fees or penalties that can increase the cost of borrowing. For example, origination fees on personal loans tend to be between 1% and 10%. Some lenders may charge prepayment penalties to ensure they don’t lose future interest payments if you repay your loan early.
• When you take out a personal loan, you’re increasing your overall debt. If you have other debts, comfortably affording all your monthly payments can become a challenge. And missing payments or making late payments can have a negative impact on your credit score.
Recommended: What Is Considered a Bad Credit Score?
Pros and Cons of Personal Loans
Here’s a look at the pros and cons of personal loans at a glance.
| Pros of Personal Loans | Cons of Personal Loans |
|---|---|
| Wide range of loan amounts, usually between $1,000 and $100,000. | Interest rates may be higher than those of other types of loans, such as home equity loans or HELOCs. |
| Use of funds is flexible. Borrowers can use money from personal loans toward almost any purpose. | Fees and penalties can make borrowing more costly. |
| They are generally unsecured loans, which is beneficial to those who don’t want to put up collateral. | They increase your debt, potentially putting a strain on your budget. |
When Can It Be a Good Idea to Get a Personal Loan?
So when is a personal loan a good idea?
Debt Consolidation
One reason to take out a personal loan is to use it as a credit debt consolidation loan to pay down high-interest credit card debt. The average credit card interest rate as of April 2026 is 19.16%. The current average personal loan interest rate as of May 2026, on the other hand, is 12.27%. If you have excellent credit, you may pay less, and if you have poor credit, you could pay more.
Consolidating high-interest credit card debt with a lower-interest-rate personal loan may make your monthly payments more manageable and potentially save you money in interest payments over the life of the loan.
If you use a personal loan to pay off credit card debt, it’s a good idea not to use those credit cards to incur even more debt.
Home Improvement
Using a personal loan to make improvements to your home may also be beneficial, as home improvements can increase the value of your home, possibly offsetting the cost of borrowing.
When Can It Be a Bad Idea to Get a Personal Loan?
There are a number of cases where you may wonder if getting a loan is bad. Here’s a look at some situations where getting a personal loan may not be a good idea.
No Credit Check Loans
Most loans — including most personal loans — require a credit check. This helps your lender understand your creditworthiness, or how likely you are to repay your debts. Generally speaking, the healthier your credit, the more favorable your loan interest rates and terms. Those with poor or limited credit may find it difficult to qualify for a loan.
No-credit-check personal loans, on the other hand, look at your bank account balance or require you to pledge some asset as collateral to secure the loan.
The problem is that these loans also tend to be extremely expensive — interest rates can well exceed 100%, which is generally considered to be predatory. There’s a pretty good chance that borrowers who rely on no-credit-check loans won’t be able to pay their bills on time, which could trap them in a cycle of debt.
Recommended: How to Avoid Falling Victim to Predatory Loans
Cheaper Alternatives May Be Available
Before taking out a personal loan, consider whether there are cheaper alternatives. We’ve already mentioned home equity loans and HELOCs. You might also consider a no-interest credit card, which charges 0% interest for an introductory period typically lasting between 12 and 21 months. If you can pay down your debt in this period, this may be a good option. But whatever balance you don’t repay in time may revert to the card’s regular rate, which is likely high.
You Are Not Good at Managing Debt
If you’re not good at managing debt, think twice before taking on more. And if you use your personal loan to consolidate credit card debt, you’ll want to be careful about racking up new credit card bills.
Discretionary Spending
Borrowing money for discretionary spending, such as vacations or an engagement ring, generally isn’t a good idea. While these things are nice, they aren’t necessarily worth jeopardizing your financial well-being. Instead of borrowing to pay for big-ticket items such as these, you may be better off saving for them in advance as a part of your regular budget.
Borrowing Money for Investments
It’s generally not a good idea to borrow money to make investments. By nature, investments are risky, and you’re not guaranteed a return. Should the investment lose money instead of gaining, you’ll be responsible for repaying your debt, regardless of the investment loss.
The Takeaway
So are personal loans bad? The answer depends on how you plan to use the loan. Personal loans can be useful tools for purposes such as consolidating credit card debt, making home improvements, and more.
Any time you’re considering a loan, it’s important to understand whether it will meet your needs, what it will cost you, and whether there are any better alternatives out there.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Do personal loans hurt your credit?
They can, at least at first — a new loan adds to your overall debt and means a hard credit check. If you miss payments, your score will drop, but making on-time payments helps you stay on track.
When is getting a personal loan a good idea?
It can be a good idea when you’re consolidating high-interest credit card debt, since personal loan rates are usually lower. It’s also common to finance home improvements that could boost your home’s value.
When is getting a personal loan a bad idea?
It’s usually a bad idea if you already have a lot of debt or can’t comfortably afford the monthly payment. You should also avoid no-credit-check loans with very high rates and skip borrowing for vacations or investments.
What are the risks of taking out a personal loan?
You’ll often pay an origination fee of 1% to 10%, and some lenders charge a fee if you pay early. Because the loan is unsecured, the rate may be higher than a secured option, and you’re adding to your total debt.
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