Should I get a personal loan?

When you can benefit from borrowing — and might want to steer clear.

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A personal loan might not be an obvious choice if you’ve never before borrowed money for anything other than school. But a loan can help you avoid taking on other kinds of debt that are more difficult to repay. Watch out for situations where it might not be the best option, however.

Our top pick: Monevo Personal Loans

  • Min. Credit Score Required: 450
  • Min. Loan Amount: $500
  • Max. Loan Amount: $100,000
  • APR: 3.99% to 35.99%
  • Requirements: Credit score of 450+, legal US resident and ages 18+.
  • No obligation offers
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Our top pick: Monevo Personal Loans

Quickly compare multiple online lenders with competitive rates depending on your credit.

  • Min. Credit Score Required: 450
  • Min. Loan Amount: $500
  • Max. Loan Amount: $100,000
  • APR: 3.99% to 35.99%
  • Requirements: Credit score of 450+, legal US resident and ages 18+.
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How do personal loans work?

A personal loan is money you borrow in one lump sum — typically between $2,000 and $50,000 — from a bank, credit union or online lender. You can use a personal loan for most legitimate personal expenses and to consolidate your debt, though some lenders won’t allow you to apply the funds toward education or investments.

When should I use a personal loan?

Personal loans are useful tools that can help you save money and time when you’re juggling existing debt, facing specific types of bills or looking to leverage improved credit.

1. If you’re struggling with credit card debt

A top reason borrowers take out a personal loan is to consolidate and pay off credit card debt. Debt consolidation involves taking out a personal loan in the amount that you owe on your existing credit cards and using the funds to pay off your creditors, ideally at a lower rate than the average you’re paying today. You repay your loan with fixed monthly repayments over a set period of time — usually three to seven years.

Because personal loans typically have lower interest rates than credit cards, you can save on unnecessary interest. If you consolidate two or more bills, you also simplify your life by paying one monthly payment to one lender.

Compare debt consolidation loans

2. If you have a personal loan and your credit has improved

If your credit score has improved or you’re making more money than you did when you originally took out an existing loan, you might be able to save money by refinancing.

Refinancing involves taking out a new personal loan to pay off a loan you already have in your name. While many borrowers refinance to take advantage of a more favorable rate, you can also refinance to take a cosigner off your loan or lower your monthly repayments.

How refinancing works on a personal loan

3. If you have an expense you can’t put off

You need to buy a plane ticket, but you don’t have the time to save up for it. Or maybe you need to relocate for a new job, but you don’t have the savings on hand.

In these cases, a personal loan can help you get funds you need to take advantage of an opportunity. While it’ll cost you more than paying up front, that once-in-a-lifetime adventure or more lucrative job could outweigh what you’ll pay in interest.

4. If your insurance won’t cover a medical procedure

A personal loan isn’t always the best choice for covering the costs of an upcoming medical procedure. But if your only other option is in-house financing, you might find a better deal with a personal loan provider.

Ask your medical provider about its in-house rates and terms before you shop around to make sure you’re getting the most competitive offer you’re eligible for.

Compare your medical financing options

5. If you’ve maxed out federal and private student loans

Not all lenders allow you to use a personal loan to pay for school — but some do. In fact, providers like Boro specialize in offering personal loans to students to help cover extra expenses that crop up. And because they typically can’t benefit from a student loan on their own, personal loans are often international students’ only financing option.

6. If you need to make home repairs

Taking out a loan to make home repairs can actually save you money in the long run. That’s because essential repairs can actually increase the value of your home. This ups your net worth and can get you a better deal if you’re interested in selling.

Compare personal loans

Updated November 13th, 2019
Name Product Filter Values APR Min. Credit Score Max. Loan Amount
3.84% to 35.99%
Good to excellent credit
$100,000
Get loan offers from multiple lenders at once without affecting your credit score.
5.95% to 35.99%
Fair to excellent credit
$100,000
Get personalized rates in minutes and then choose a loan offer from several top online lenders.
6.98% to 35.89%
620
$50,000
Affordable loans with two simple repayment terms and no prepayment penalties.
3.99% to 35.99%
450
$100,000
Quickly compare multiple online lenders with competitive rates depending on your credit.
6.49% to 17.99%
650
$25,000
With over 80 years of lending experience, this credit union offers personal loans for a variety of expenses.
34% to 155% (Varies by state)
550
$10,000
Check eligibility in minutes and get a personalized quote without affecting your credit score.
6.95% to 35.89%
640
$40,000
A peer-to-peer lender offering fair rates based on your credit score.
3.84% to 35.99%
550
$100,000
Get connected to competitive loan offers instantly from top online consumer lenders.
5.99% to 17.88%
680
$100,000
No fees. Multiple member perks such as community events and career coaching.

Compare up to 4 providers

When should I not use a personal loan?

A personal loan can offer lower rates than credit cards and other forms of debts. But it might not be the best solution under a few key circumstances.

1. If you can easily save the money

Have your eye on a luxury item or feeling the itch for an exciting vacation? If your needs aren’t immediately, you might want to work out how much your repayments would be and save that amount each month instead. Otherwise, you could be paying for your splurge many years later.

  • Try this instead: Open a high-interest savings account dedicated to the trip and use a budgeting app to manage your expenses.

2. If it’s a bad investment

Are you thinking of borrowing for home improvements or another investment? Make sure it’s bound to add value in the long run, otherwise you could be left paying interest on an improvement that ultimately lost you money.

  • Try this instead: Figure out what would add value to your home —or life — and finance that purpose instead. If you make money off your investment, use it on the more-risky projects.

3. If your credit score has decreased

Even if you want to consolidate debt or fix up your house, taking out a personal loan might not be the best idea if your credit score has recently taken a hit. You might not be able to qualify for competitive rates and terms — or at all with some lenders. And if you’re interested in debt consolidation, you might get even higher rates than you had before.

  • Try this instead: Take steps to improve your credit such as getting a credit-builder loan before you borrow again.

4. If your income and employment aren’t stable

Taking out a personal loan when your finances are unsteady could hurt you in the long run. It can also be difficult to qualify for a competitive rate if you don’t have a steady full-time job, since many lenders consider your employment when you apply. Self-employed applicants can also have a difficult time qualifying with some online lenders, since it can be difficult to provide proof of income.

  • Try this instead: Cut back on expenses, consider taking on a side gig and focus on building an emergency fund to help avoid needing a loan.

Should I use a personal loan to improve my credit score?

Not necessarily. While a personal loan can improve your credit if you make on-time repayments, it’s not always the cheapest way to do so. If you’re able to qualify for a credit card on your own, paying off your purchases before your next payment is due is a cost-free way to improve your credit rating.

Don’t yet have a credit score? Many credit unions and local banks offer small-dollar loans to build your credit. These credit-builder loans come low interest rates, but most lenders place the funds in a locked savings account that you can’t access until you’ve fully repaid the loan.

You can also sign up for a service that reports your bill payments to the credit bureaus to help you build your credit score.

13 more ways to improve your credit score

5 tips for taking out a personal loan

Ready to take out a personal loan? Follow these strategies to narrow down the right one for your situation.

  1. Know your credit score. Many lenders require minimum credit scores. Check your score online for free so that you know where you stand, making it easier to find a loan you’ll qualify for.
  2. Compare lenders. Research and weigh as many lenders as possible to find the best rates and terms for your needs.
  3. Prequalify with providers. Narrowed your options down to a few? Complete each lender’s prequalification application to learn the rates and terms you might qualify. Prequalification is based on a soft credit pull that doesn’t affect your credit score.
  4. Consider the fees. An APR represents your loan’s rates and fees as a percentage. But it doesn’t include late fees or prepayment penalties. It also doesn’t tell you when and how you’ll pay common personal loan fees.
  5. Go for the shortest term you can afford. You might be tempted by a longer term’s lower monthly repayments. But you’ll likely end up paying a lot more in interest over the lifetime of your loan.

Don’t need a personal loan? Consider these alternatives

  • 401(k) loans. Some employers allow you to borrow from your retirement account to avoid those early-withdrawal penalties — as long as you keep your job and pay it back on time.
  • HELOCs. Home equity lines of credit (HELOCs) allow you to pay for ongoing home improvement projects without having to borrow a set amount. It’s backed by the equity you own in your home, meaning that you can often get lower rates, but also risk losing your house.
  • Private student loans. When you’ve run out of federal aid, private student loans tend to have more competitive rates and flexible terms than a personal loan. Go for these first if you need help paying for school.

You can read about even more ways to finance your personal expenses by checking out our article on personal loan alternatives.

Bottom line

A personal loan is a valuable tool that can help you cover a large one-time expense you can’t put off or consolidate multiple debts. But at the end of the day, you’re still borrowing money with interest. Make sure the benefits outweigh any drawbacks for your situation.

Read our guide to personal loans to learn out more about these products work and compare top lenders.

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