personal loans

The pros and cons of personal loans

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Man concentrating on finance calculations | Geber86/E+/Getty Images

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Maybe you're looking for a way to pay down your holiday debt, cover the cost of a car repair or pay for your wedding. A personal loan can be a quick source of cash, typically without the high interest rates of a credit card or credit card cash advance.

"It's certainly an option you don't want to ignore," says J.J. Montanaro, a certified financial planner professional with USAA.

Personal loans have become a fast-growing financing option for consumers, and demand continues to rise.

TransUnion found the number of people with secured and unsecured personal loans stood at 27.34 million at the end of the 3rd quarter of 2015, up 18% from 22.5 million in the 3rd quarter of 2013.

RATE SEARCH: If you're ready to take out a personal loan, check out current rates at

Pay back your debt in installments

With a personal loan, you borrow a certain amount of money for a certain period of time, and pay it back in regular monthly installments.

Sometimes, the loans are unsecured, which means you don't have to put up collateral, like a house or car. The rate you pay is based on your credit history and credit score.

Along with traditional banks and credit unions, you also can find personal loans at online banks, such as Discover; online nonbank lenders, such as SoFi; and peer-to-peer lenders, such as Lending Club.

You don't have to accept the first offer you get for a personal loan. Shop around for the best rates at

Here, Bankrate offers some of the pros and cons for those considering taking out a personal loan.

The pros of personal loans

A personal loan can be a good way to consolidate existing debt, such as credit cards, says Kathryn Bossler, a financial counselor at the nonprofit GreenPath Debt Solutions. "You're essentially refinancing. You may be able to lower your monthly payment and interest rate."

As of November, the last month for which figures are available, the Federal Reserve reported the average rate on a 24-month personal loan was 9.7%, while the average rate on a credit card that was assessed interest was 13.7%.

Some personal loans carry rates of 6% or 7% for the most creditworthy consumers.

If you're trying to pay down several credit cards, you may be able to roll all your bills into a personal loan, so you have only 1 monthly payment to keep track of, Bossler says.

Montanaro says that another advantage with a personal loan is you pay a set amount for a specific length of time. "One of the things I like is that it gives you a clear beginning and end to knocking out your debt. You can see the light at the end of the tunnel," he says.

Expect a quick decision on whether you're approved

The loans are also easy to apply for, compared with a mortgage or home equity line of credit, and you'll get a quick decision as to whether you're approved, Montanaro says. If you are, the money will typically show up in your bank account within a few days.

If you need a way to pay for such things as an unexpected car repair or medical bill, or even finance a big expense such as a wedding, a personal loan often will have a lower interest rate than a credit card advance. The average rate on a cash advance is 23.53%, according to

Need a personal loan to pay for a wedding? You'll find the best rates at

The cons of personal loans

If you use the loan for debt consolidation, you need to remember "you're not paying off debt, you're just transferring it from one type of debt to another," Bossler says.

And, if you transfer your credit card bills to a personal loan, there's always the chance you might charge new debt on your credit cards. A personal loan "provides the opportunity to dig yourself out of a hole. It also has the potential to become a bigger hole," Montanaro says.

While you may receive a mailing that mentions a great rate for a personal loan, "only the best qualified customers are going to get the teaser rate," Bossler says.

Some personal loans carry much higher interest rates, so it's imperative that you read the fine print and understand the exact terms of the loan that you're considering.

Does a loan fit into your budget

You also need to be sure that the monthly payment fits within your budget, Bossler says.

Before taking out a personal loan, check the rates being offered at

And, you may be charged an origination fee by the lender, which typically ranges from 1% to 5% of the loan amount.

Some consumers shifted to personal loans during the recession, when home equity loans and lines of credit dried up, Montanaro says.

As the housing market has rebounded, home equity loans are becoming more readily available. One big advantage to a home equity loan is your ability to write off the interest. You can't do that with a personal loan.


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