Personal loans are a great fit in many cases. But trustworthy lenders will also be clear that there are some personal loan risks to be aware of as well.  

Here are seven benefits that make personal loans so popular, as well as three risks to consider:

Benefits of Personal Loans

If you need cash and can take on the debt, here’s why you might consider personal loans:

Easy to Apply For

In many cases, personal loans are relatively quick forms of borrowing. You can often apply for a personal loan online and if you qualify, have your loan funds in a matter of days. In some cases, you’ll have the funds in less time than it takes a credit card to hit your mailbox.

Very Manageable

If you have multiple sources of debt, then chances are you know how inconvenient it can be. Tracking payment dates, mailing checks, transferring money online, dealing with multiple lenders . . . aren’t you busy enough already??  

Debt consolidation is a popular use for personal loans. Many people prefer having most their debt obligations in one single source, rather than spread over multiple credit cards and other accounts. As another benefit, the monthly payment can sometimes be lower under a consolidated debt arrangement depending on the interest rates and loan terms of the loans being consolidated.

You Can Often Have an Option to Use Collateral

With credit cards and some other lending sources, there’s very little wiggle room for qualification. With personal loans, however, you often have the option of using collateral to improve your chances of qualifying for a higher loan amount (depending on the lender). Guaranteeing your loan with personal property, such as a laptop or automobile, could improve your loan eligibility options.

Fixed Payments and Interest Rate

Credit card rates can change and often for the worse, especially as introductory rate offers expire.

With personal loans, however, the interest rate is typically fixed based on what you agreed upon initially. This keeps things predictable and helps ensure you’re always making forward progress toward a definite end and pay off of your debt.

Creates a Track Record of Payment History

If you’re looking for opportunities to demonstrate that you’re worthy of credit, you can take out a personal loan and keep up with your payments. Future lenders will usually be able to see your timely payment history and may be more willing to give you a new loan. Just be sure not to miss any payments; as this could reflect poorly on your credit in the future!  

Interest Rates Can Be Lower Than Other Forms of Borrowing

Although borrowing rates differ based on many factors, on average, commercial bank interest rates for personal loan were lower than those of credit cards in Q1 2022, according to the Federal Reserve. The average commercial bank interest rates for credit cards was 14.53%, with personal loans averaging 9.5%. However, your rates may differ significantly from either of these numbers depending on your credit and by lender.


For the most part, you can use a personal loan for whatever you wish—refinancing debt, vacations, holidays, and myriad other purposes. There may be a few exceptions, but for the most part, your loan spending isn’t restricted.

Three Personal-Loan Risks to consider

While personal loans are good fits for many people, there are some risks to be considered when borrowing. Know this about your loan:

Collateral Can Be Forfeited if You Don’t Pay Back Your Loan

If you use collateral for your loan such as your vehicle, while it may improve your loan eligibility or loan terms, it could be subject to repossession by the lender if you get too far behind on payments and default on the loan. Because of this, you should carefully consider your ability to repay your debt as you pledge such collateral against your loan.

Monthly Payments Can Be Higher Than Credit Cards

Credit cards often let you make a minimum payment that is sometimes almost entirely on interest and barely any on the principal. This can be attractive on months where you may be short on funds, however the disadvantage is that you hardly make any progress in paying off your loan And likely results in a higher amount of interest accruing over time.   In contrast, many people like personal loans because there’s typically a clear end date for when the loan will be paid off.

It’s More Debt

Lastly, personal loans must be paid back. While that may seem like common sense, some people may be focused on borrowing first and figuring out how they’re going to pay it back later. This can be risky, so it’s best to have a good plan up front to repay any loan you decide to take.

Before you take out a loan, it’s best to look carefully at your entire financial situation, and weigh the pros and cons of your various loan options.

Weighing the Personal Loan Pros and Cons

Borrowing is a big decision. Sometimes, it’ll be clear that you need cash and you need it now. However, it’s best to go into any new financial scenario with eyes wide open.

Personal loans have many advantages, including convenience, expediency, and flexibility, but they’re not right for everyone. But before taking out a loan, consider all your options and consider what’s best for your unique financial situation.



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