Should I Get a Personal Loan? | Pros & Cons of Personal Loans | Equifax (2024)

FAQs

Is it ever a good idea to take out a personal loan? ›

If you owe a substantial balance on one or more high-interest-rate credit cards, taking out a personal loan to pay them off could save you money. For example, the average interest rate on a credit card is 23.99%, while the average rate on a personal loan is 11.48%.

Personal loans often come with a slew of different charges. Some loans charge a prepayment penalty that impacts borrowers who plan to pay back their loans early. Others may charge an origination fee that's typically between 1% and 6% of the loan amount. There may also be fees for missed or late payments.

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

If you don't keep up with your monthly payments or fail multiple applications, personal loans can harm your credit score. When you apply for a loan the lender will conduct a hard-credit inquiry, which will knock your score down a few points and the amount of debt you owe vs. your annual income can damage your credit.

In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.

Higher interest rates and fees: Banks tend to charge higher interest rates and more fees compared to their credit union and online lender counterparts. 12 If you don't qualify for a discount rate, you might end up paying more through a bank than you would with another lender.

You should avoid using a personal loan to pay for college tuition, investments, basic living expenses, vacation, discretionary purchases and gambling, as well as a down payment and the costs associated with starting a business.

Requirements to receive a personal loan

This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.

Do personal loans affect your taxes? ›

Personal loans aren't considered income, so you usually don't pay taxes on them. While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.

Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.

If that's your goal and you have a solid repayment plan, taking out a loan may not be a bad idea. But, if your credit needs work, you may be considered a risky borrower and your lender may charge a higher interest rate than if your credit is good.

If you decide that you don't want or need a loan once you have received the funds, you have two options: Take the financial hit and repay the loan, along with origination fees and prepayment penalty. Use the money for another purpose, but faithfully make each monthly payment until the loan is paid in full.

High-risk loans are designed for bad-credit borrowers and can be a workaround to accessing the funds you need. But there are also risks to consider, like higher costs to borrow and possibly losing any collateral you use to get the loan, if you can't pay it back.

You might get a better deal in 2024

While interest rates are up right now, things could start to change in 2024 if the Fed decides to cut rates. So next year might be a better time to put a personal loan in place. Let's say you're looking to borrow $10,000 and pay it back over a five-year period.

As a general rule, don't borrow more money than you can handle. Borrowing money is a lot easier than paying it back. Smart borrowing can be convenient and help you achieve important goals like buying a home, buying a car, or going to college.

When rates are low, it's usually better to borrow the money. Dipping into savings will cost you some earned interest, and when mortgage and consumer loan rates are low, it can work in your favor to borrow the cash. Your savings are long-term.