Surprising benefits of personal loans (and a few downsides to understand)

By Gideon Sandford

Reviewed by Kimberly Rotter

May 23, 2023

Read time: 5 min

Shot of a young couple going over their finances together at home

Key takeaways:

  • Personal loans can save you money on interest compared to credit cards.

  • You can use a personal loan to cover just about any large expense.

  • It’s possible to get your personal loan funds the day after you apply.

Checking out your options before rushing in is exactly the right way to approach any new financial commitment. Used the right way, a personal loan is a tool that can help you get ahead. 

No financial solution is right for every situation. A personal loan is just one of many choices you have. Here are the details you need to know.

Personal loan pros and cons: an overview

A personal loan is a way to borrow money to pay off existing high-interest debt, cover unexpected expenses, or pay for things like moving or home improvements over time. With a personal loan, you get the money up front, at a fixed interest rate that won’t change for the life of the loan. The monthly payments will all be the same, calculated to pay off the loan in full by the end of a predetermined amount of time (the repayment period or “loan term”).

Advantages of a personal loan

Disadvantages of a personal loan

Debt consolidation with a personal loan can make your credit score rise sharply

Minimum loan amount might be higher than what you need

Some personal loans fund the next business day

Maximum loan amount might not be high enough for larger expenses, like a home remodel

Fixed interest rate means your monthly  payment amount won’t change

Not as flexible as a line of credit that allows you to borrow, repay, and borrow more as needed

On-time payments can help you build great credit

Not available to applicants with low credit scores

You can use the money for a variety of expenses

Having a personal loan can affect your eligibility for other loans, like a mortgage

Possibly lower interest rate than other financing options you have


The pros: benefits of a personal loan

If the loan is for consolidating credit card debt, your credit score may rise

One important part of your credit score is the percentage of your total credit you’re currently using (this is called your “credit utilization ratio”). If some or all of your credit cards are currently maxed out, this will lower your credit score. If you use a personal loan to consolidate your credit card debt and pay off those cards, your utilization rate will drop and your credit score may rise.

Some personal loans fund the next business day

Personal loans can be approved and funded quickly. If you have an emergency expense like a car repair or storm damage, then being able to get money fast can be a huge relief. If your application is completed early enough in the day, it may go through underwriting and approval on the same day, and you can receive the funds as soon as the next day. Most personal loans through Achieve are funded within 72 hours.

With a fixed interest rate, your monthly payment amount won’t change

When you take out a personal loan, the lender will tell you the interest rate, repayment term, and monthly payment. On a fixed-rate loan, the monthly payment stays the same over the life of the loan, which can make budgeting simpler. And if you pay more than your monthly payment, you can also pay off the loan in less time and pay less in total interest.

On-time loan payments will help you build great credit

A personal loan can increase your credit score over the long term as well. Lenders report each of your payments to the credit bureaus and a record of on-time payments is a big part of your credit score.

You can use the money to cover a variety of expenses

The flexibility of personal loans is another big advantage. A single loan can pay for a variety of expenses over time with a fixed interest rate and repayment schedule.

Personal loans can save you money on interest compared to credit cards

Finally, if you already have credit card or other high-interest debt, personal loans may offer lower interest rates or lower monthly payments, or both.

The cons: disadvantages of a personal loan

The minimum amount might be more than you need

Personal loans usually have minimum loan amounts that might be more than what you need. If you need to pay for a smaller purchase over time, you might consider borrowing from friends or family, paying with a credit card, or using in-store financing.

The maximum amount might not be enough for a major expense

Likewise, for a very large purchase, you might need more than what you can get with a personal loan. They tend to top off around $50,000 (bigger personal loans exist if you have excellent credit). If you need to borrow more, you may need to explore other options like a home equity loan or home equity line of credit.

Not as flexible as a line of credit  

Since a personal loan is a one-time distribution (that means you get all the money up front as one lump sum), it’s less flexible than a line of credit. A line of credit usually allows you to borrow, pay down the balance, and borrow more as you need it over time. If you take out a personal loan and then need more, you’ll need to take out another loan.

Not available to applicants with low credit scores

If your credit score is below 620, you may not qualify for a personal loan with good financial terms. Personal loans for bad credit are available, but they tend to be very expensive.

May affect your eligibility for other loans, like a mortgage

Personal loans appear on your credit report and can affect your eligibility for other credit like car loans and mortgages. Lenders look at your total debt-to-income ratio, which means how much of your pre-tax income goes to debt and housing payments. Borrowing with a personal loan may make it harder to borrow more until the loan is paid off.

A free consultation with a loan advisor about your situation and your financial needs can help you decide what the best option might be.

Gideon Sandford

Gideon is a financial expert who writes about financial planning, access to credit, and debt strategies. He has over a decade of experience helping readers manage their money and use debt responsibly.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

When you apply for a personal loan, the lender will tell you the amount you qualify for and the amount of your monthly payment, among other details. Look at your existing monthly expenses, including any debt you’re paying off, to decide whether you can afford to make payments on the personal loan

Personal loans come in two varieties—secured and unsecured. The vast majority are unsecured. An unsecured loan is one that you qualify for based on your creditworthiness and financial situation. 

A secured loan, on the other hand, means that you’re borrowing against something of value. A car loan and a mortgage are the two most common types of secured loans. It’s possible to find a secured personal loan. For instance, some people borrow against their own savings.

There are many kinds of personal loans for common situations and they sometimes come with a label that matches the situation:

Ultimately, these are all personal loans.

Once you’ve submitted your application and verified your income, you may be approved for a personal loan on the same day. The process can take longer if the lender needs to verify extra information like your address or employer. Once approved, you can receive the money in as little as 24 to 72 hours.

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