A personal loan can be a useful option when you need to borrow money to cover a medical bill, fund a home repair, or consolidate debt. This kind of loan can offer a considerable lump sum of cash at a relatively low interest rate, but the lender may charge fees. You’ll need a good credit score to qualify.
Before you decide that a personal loan is right for you, it’s important to understand the pros and cons that come along with them. Here, the information that can help you make a wise choice.
Key Points
• Personal loans offer flexibility in use, often featuring lower interest rates compared to some other financing options.
• Potential drawbacks include fees, penalties, and the possibility of securing better rates with alternative loan types.
• Consolidating high-interest debt with a personal loan can simplify payments and potentially reduce overall interest costs.
• Timely repayment of a personal loan can positively influence an individual’s credit score.
• Applying for a loan can temporarily lower credit scores, and missed payments or increased debt load may also cause harm.
What Are Personal Loans?
What is known as a personal loan is money that you borrow from a bank, credit union, or online lender. Typically, it’s a lump sum amount you receive and, since it’s an installment loan, agree to repay the loan principal and interest at regular intervals — usually monthly.
The interest rate for a personal loan is likely to be fixed-rate, and the loan’s term is usually between two and seven years.
When you apply for a personal loan, your lender will run a hard credit check, which will help determine your interest rate. Generally speaking, borrowers with higher credit scores have a better chance of being offered lower interest rates and more favorable terms. The higher your interest rate, the more money it will cost you to borrow.
With many lenders, you will need at least a good FICO® credit score to qualify, and a higher score will probably allow you to get more favorable rates.
Recommended: 11 Types of Personal Loans
How Personal Loans Work
Before delving into the pros and cons of personal loans, it’s worthwhile to familiarize yourself with the basics of this kind of loan and how they typically function.
Loan Terms and Repayment
Personal loans are made up of the principal (the amount you are borrowing), the interest rate you will be charged, and any fees you will pay, such as origination fees. The annual percentage rate (APR) helps you evaluate the amount the loan will cost you in terms of both interest and fees. You’ll repay the loan in monthly installments over the loan’s term, which is usually between two and seven years.
Fixed vs Variable Rate
A personal loan can have either a fixed or variable interest rate. Most have a fixed rate, meaning you’ll lock in a rate when the loan begins, and that rate (and your monthly payment) will stay constant over the life of the loan.
However, you may be able to find variable rate loans, if you prefer. In this case, the interest rate will fluctuate with the market, meaning your payments may rise and fall over the loan’s term.
The Benefits of Personal Loans
Personal loans are a flexible option for borrowers looking to accomplish a variety of goals, from consolidating other debts to remodeling their home. Here’s a look at some of the advantages.
Comparatively Low Interest Rate
Personal loans offer relatively low interest rates when compared to other methods of short-term borrowing. The average personal loan interest rate is 12.25% as of October 2025.
Credit cards by comparison had average interest rates of over 20% at the same moment. A personal line of credit, which allows the borrower to withdraw funds up to a limit during the draw period, may have interest rates that vary between11% and 21%, depending on credit score and other variables.
Some forms of predatory short-term lending, such as payday loans, can charge the equivalent of many times these rates to borrow. Some even have annual percentage rates (APRs) of 400%, so it can be wise to proceed with caution and see what lower-cost sources of funding may be available.
| Â |
Average Interest Rates |
|
Personal Loans |
12.25% |
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Credit Card |
20% and higher |
|
Personal Line of Credit |
11% – 21% |
Comparatively High Borrowing Limits
Small personal loans are usually for amounts of a couple of thousand dollars or less. (Smaller loans often come with lower interest rates.) However, $10,000 personal loans are offered by many lenders, and some will offer large personal loans of up to $100,000 to cover major expenses and life events, which may be quite a bit more than other credit options.
The average credit limit for credit cards, by comparison, is $31,165, according to credit reporting bureau Experian.
Personal lines of credit often have a range of limits from $1,000 to $50,000, which can be more than a credit card but less than a personal loan.
| Â |
Borrowing Limits |
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Personal Loans |
Up to $100,000 |
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Credit Card |
Average limit of $31,165 |
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Personal Line of Credit |
Up to $50,000 |
Personal Loans Can Be Used for Many Things
Some types of loans must be used for designated purposes. Auto loans must be used to buy a car, and a mortgage must be used to finance a home. Personal loans, on the other hand, have few restrictions on how you must use the money, and you can generally use it for any legal purpose, except business expenses and tuition.
Popular uses for personal loans can include:
• Medical, dental, or car repair bills
• Home improvement projects
• Travel
• Weddings or other major celebrations
• Holiday shopping
• Summer camp or other expenses for children
No Collateral Necessary
Unsecured personal loans are the most common type of personal loans. They are not backed by collateral, such as your car or home.
Some personal loans are secured, however, and require you to borrow against the equity in your personal assets, like a home or your savings. With a secured vs. unsecured personal loan, the lender can seize your collateral if you default, selling it to recoup their loss. As a result, secured loans present less risk for the lender and often come with lower interest rates than unsecured loans.
Simple to Manage
You can use personal loans to consolidate other higher-interest debt, for example, by paying off the balance on several high-interest credit cards. A single personal loan can offer less expensive interest, lowering the cost of your debt over time. And it may be easier to manage, since you only have one bill to pay each month. A debt consolidation calculator can help you do the math and evaluate your options.
Can Be Quick to Obtain
Policies will vary, but some lenders may offer same-day approval and funding within just a few days.
Can Help Building Credit
Your lender will likely report your personal loan and payment history to the three credit reporting bureaus — Experian®, TransUnion®, and Equifax®. In fact, 35% of your FICO® score — the most commonly used credit score — is determined by your payment history.
You can help build a strong credit history over time by avoiding late or missed payments.
Recommended: Personal Loan Calculator
The Disadvantages of Personal Loans
These loans do have some downsides, which can potentially make personal loans a bad idea for some borrowers. Here’s a closer look.
Higher Interest Rates Than Some Alternatives
Personal loans may carry higher interest rates than some alternatives. For example, if you’re looking to remodel your home, you might consider taking out a home equity loan or a home equity line of credit (HELOC). Keeping in mind the current average interest rate of 12.25% for personal loans, consider the following:
• A home equity loan uses your home as collateral to offer you a lump sum of money to use. In October 2025, the average interest rate on a 10-year fixed home equity loan ranged from 7.24% to 8.20%.
• A HELOC, on the other hand, is a form of revolving credit line that uses your home as collateral. You draw against your limit as needed during the draw period and, after a set number of years, enter the repayment period. As of October 2025, the average interest rate on a HELOC was 7.75 to 7.81%.
Also, your rate will likely vary depending on your credit score: The higher your score, the lower your interest rate may be.
Fees and Penalties
Some lenders may charge fees and penalties in association with personal loans. For instance, an origination fee helps pay for the processing of your loan application and is usually equal to a percentage of the loan amount. Fortunately, it’s possible to avoid origination fees.
Lenders may also charge prepayment penalties if you pay off your loan ahead of schedule, to make up for profit they are losing on interest payments.
Can Increase Debt
Take out a personal loan only if you are sure you can pay it off and if it makes financial sense. For example, a home remodel could increase the value of your home, and consolidating credit card debt could save you money in interest payments. But taking out a personal loan to fund a lavish wedding could wind up interfering with your ability to save for the down payment on a house.
Avoid taking out a loan that is for more money than you need to avoid the risk of taking on more debt than necessary.
Potential Impact on Credit Score
Taking out a personal loan and paying your debt on time can build your credit score, as mentioned above. However, a personal loan can also negatively impact your credit score in a few ways. When a hard credit inquiry is done during the application process, your credit score is typically lowered by several points for at least a few months. The personal loan will also increase your debt load, which could hurt your credit score. And if you are late when making a payment on a personal loan or miss it altogether, that can lower your score.
Alternatives to Personal Loans
You may want to explore personal loan alternatives, described below, as you search for the best source of funding.
• Credit cards allow users to make purchases using credit. Borrowers must make minimum payments and owe interest on any balance they carry from month to month. As noted above, the interest rates are typically high.
• A personal line of credit (PLOC) is similar to a credit card. It allows you to tap your credit line as needed. Credit is replenished when you pay back your loan.
• A home equity loan uses a borrower’s home as collateral. The value of the property contributes to determining the loan amount that is transferred to the borrower as a lump sum.
• A home equity line of credit is a revolving source of credit, like credit cards and PLOCs. As with home equity loans, HELOCs use the borrower’s home as collateral.
The Takeaway
A personal loan is a type of installment loan, usually unsecured, that allows you to obtain a lump sum of money, typically at a fixed interest rate and to be repaid in up to seven years. The pros of these loans can include their flexibility (you can use the money as you like), lower interest rates than some other sources of funding, and the speed, high limits, and convenience they offer. Among the cons: the possibility of having to pay fees and penalties, and the fact that you might be able to get a lower rate with a secured loan elsewhere.
If you’ve explored your options and decide that a personal loan is right for you, it’s wise to shop around to find the right loan.
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
What is a personal loan?
A personal loan is a loan you receive from a bank, credit union, or online lender, and it can be used for a variety of purposes. Borrowers pay back the principal and interest in regular installments. These loans are typically unsecured (meaning collateral is not needed) and offer a lump sum payment, usually at a fixed rate of interest, with a term of up to seven years.
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What can you use a personal loan for?
Personal loans have few usage restrictions. Basically, you can use them for any legal purposes, though in most cases, lenders restrict business and tuition usage. They can provide funding for everything from unexpected medical bills to home improvement projects to vacations to credit card debt consolidation.
How much money can you get from a personal loan?
Personal loan amounts typically range from $1,000 to $100,000, depending on the lender and the applicant’s qualifications.
What credit score do you need to qualify for a personal loan?
Many lenders require a credit score in the good range or higher to be approved for a personal loan. However, there are lenders who offer loans to those with fair or poor credit. The interest rates tend to be higher, though, and the terms less favorable than what those with higher scores are offered.
How long does it take to get approved for a personal loan?
Policies vary, but some personal loans can be approved on a same-day basis.
Photo credit: iStock/Anchiy
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