The Pros & Cons of Personal Loans

By Jason Ramin

Despite our search for perfection, nothing in life is really perfect. Everything will have positives and negatives, pros and cons. Moreover, the pros and cons of any given product or situation will often vary for every individual, based on their personal needs, wants, and qualifications.

When it comes to personal loans, you can look at the general pros and cons of using personal loans, but you should also take the time to evaluate those pros and cons in terms of your own needs and your specific situation.

Pro: Personal Loans Can Be Used for Anything

Perhaps the most compelling pro of personal installment loans is that they can be used to finance nearly anything — so long as it’s legal, of course. Once you finalize a personal loan agreement, the money is usually deposited into your bank account, and you can use it the same way you would any other funds.

One of the most common uses of personal loans is consolidating debt, especially high-interest credit card debt. But, personal loans can be used for other purposes, too, including everything from medical bills to home or car repairs. Personal loans are particularly useful for larger expenses that you would like to pay off over months or several years.

Con: Personal Loans May Not Be Ideal for All Uses

On the flip side, just because personal loans can be used for anything doesn’t mean they should be used for everything. You probably shouldn’t take out a personal loan to pay for frivolous purchases — e.g., vacations, jewelry, etc. — that are already out of your budget. Your better bet for these purchases is to save up the cash, then pay for it outright.

You also shouldn’t use personal loans for purchases that other types of loans will better finance. Auto loans, for instance, are almost always the best way to finance a vehicle purchase, as auto loans have much lower interest rates than most personal loans (assuming the same applicant) will charge.

Pro: Loan Terms Can Extend for Years

The main thing that makes personal loans so useful for financing large purchases or consolidating debt is that they can have long repayment terms — up to seven years, in some cases. Spreading out a large debt over a long period of time reduces the amount you need to repay each month, which can make paying off debt a more affordable prospect.

For example, a $5,000 loan at 10% interest repaid over one year would require monthly payments of around $440. If that loan is repaid over five years, however, the monthly payment drops to just $106.

Con: Longer Loans Tend to Cost More Overall

The downside to a long personal loan — or any type of loan, for that matter — is that the longer you take to repay a loan, the more money that loan will cost you in the long run. That’s because each additional monthly payment means additional interest fees, and those fees add up over time. In the previous example, paying the loan off in one year costs $275 in interest, while paying it off in five years costs $1,374 in interest fees.

It’s a good idea to spend some time with a loan calculator before you search for a personal loan. Take the time to change up the terms and evaluate the potential impacts to your budget to get a picture of your ideal loan terms. The goal is to have an affordable monthly payment without extending your loan terms more than necessary.

Pro: Payments Are the Same Each Month

A major issue with credit card debt is that the size of the monthly payment can change each month as the balance and interest fees change. This can make it difficult to properly plan and budget for those payments.

Personal installment loans, on the other hand, have a set monthly payment amount that is the same for the duration of the loan (excepting, perhaps, the final payment). This makes it easy to know what you’ll owe each month and to budget accordingly.

Con: Nothing Else Can Be Added to the Credit Line

Of course, the reason the monthly payments are the same each month is that personal loans are closed credit lines, meaning once you’ve received your loan funds — that’s it. You can’t add any additional debt to the loan after the agreement has been signed, and the account will be closed once the agreement is fulfilled and the loan is repaid.

In contrast, credit cards represent revolving credit lines, which can be used, paid down, then used again, so long as credit is available and you make at least the minimum payment each month. Unfortunately, this also means that interest can accrue each month you roll over a balance, and interest can accrue well beyond your credit limit if it goes unpaid.