What Are the Benefits of Obtaining a Personal Loan?

Personal loans can provide funding with more predictable repayment terms than credit cards can, and interest rates tend to be lower than other financial products. These factors may matter more to you if you’re borrowing a large amount, or if you’re hoping to use your loan for debt consolidation. Interest rates on most personal loans are also fixed instead of variable, which can be a major consideration for borrowers worried about rising loan costs.

Key Takeaways

  • Personal loans afford a borrower more flexibility in how they can use their funding, in addition to potentially receiving that funding the same day they apply.
  • Although your credit score will take an initial hit after applying for a personal loan, making on-time payments on a personal loan will ultimately improve your credit score.
  • In addition to having a higher borrowing limit, a personal loan will typically have a lower interest rate than what you would find with most credit card offers.

10 Benefits of Personal Loans

There are many benefits of a personal loan, although some of them will depend on why you’re borrowing in the first place. With that in mind, you’ll want to think over the purpose of your loan before you borrow money, in addition to whether a loan alternative could leave you better off. Consider the potential advantages:

Flexible Use

Personal loan companies rarely make you decide how you’ll use the money ahead of time. This means the list of purposes for a personal loan is nearly endless, and you can even apply for funding if you’re undecided on how you’ll use the cash.

That said, popular uses for personal loans include debt consolidation, weddings, vacations, college tuition and expenses, home remodeling projects, and more.

One Lump Sum

Also be aware that, unlike lines of credit and credit cards, personal loans give you a lump sum of money up front that you can use however you want.

Getting a lump sum of cash can be useful and practical, whether you are using the money to pay off high-interest credit cards, need to pay a contractor for work completed in your home, or are ready to splurge for a family vacation.

Fast Funding

Some personal loan companies provide funding as soon as the day you apply, whereas others will transfer your loan funds to your bank account within a few business days at most. This may be important to you if you need cash quickly for any reason, particularly if you are ready to move forward with a major purchase or have unpaid bills to take care of.

They Can Help Build Your Credit Score

While you’ll get a hard inquiry placed on your credit reports when you apply for a personal loan, using the loan responsibly can help build your credit score thereafter. 

For example, a personal loan can help you show on-time payments on your credit reports, which is the most important factor that makes up FICO Scores. A personal loan can also improve your credit mix, which is another factor that plays a role in your credit score.

Higher Borrowing Limit than a Credit Card

Personal loans typically let you borrow $2,000 to $50,000, although some personal loan companies offer funding up to $100,000. You’ll need the employment history, income, and credit score to qualify for these higher loan amounts.

Lower Interest Rates than a Credit Card

Interest rates on personal loans are considerably lower than what credit cards charge, which means you can save money as you pay down debt.

The Board of Governors of the Federal Reserve System noted that the average interest rate for a 24-month personal loan came in at 11.48% as of February 2023. This is considerably lower than the average interest rate on credit card accounts assessed interest that month, which was 20.92%.

Predictable Repayment Schedule

Because credit cards are a type of revolving credit, you can borrow and pay back your line of credit over and over again. This also means you can make payments on your credit card in perpetuity if you keep using it for purchases.

However, personal loans are different because they come with a set repayment term that you agree to ahead of time. This means you can borrow a fixed amount, make a fixed monthly payment, and know when you’ll be debt-free from the start. You can easily determine how your loan term can impact your monthly payment with a personal loan calculator.

Flexible Repayment Terms

While the repayment plan for personal loans is set ahead of time, you do have some flexibility there. Some lenders offer only a few repayment plan options, whereas others offer repayment terms from 12 to 84 months.

A few personal loan companies even offer much longer repayment terms. For example, LightStream lets eligible borrowers pay off their loans over up to 144 months.

No Collateral Required (Usually)

Most personal loans are unsecured, although secured personal loans do exist. With an unsecured personal loan, you get to borrow a lump sum without putting down a cash deposit or any other type of collateral.

Easy Application Process

Finally, personal loans are incredibly easy to apply for, whether you want to get funding through a bank or credit union or prefer to handle the process online. Online lenders in particular can get you approved for a personal loan within a few hours, which is why they can offer same-day or next-day funding directly to your bank account.

What are some cons of a personal loan?

When it comes to the potential downsides of personal loans, you should know that loans with the best rates and terms typically only go to borrowers with good or excellent credit. If you have bad credit and need a personal loan, your annual percentage rate (APR) could be as high as 35.99%, according to OneMain Financial.

Personal loans for bad credit can also have origination fees of up to 10% of the loan amount.

What is the best alternative to a personal loan?

The best alternative to a personal loan depends on the assets you have and how much you need to borrow. However, common alternatives include home equity loans and home equity lines of credit (HELOCs), peer-to-peer loans, credit cards, and cash-out mortgage refinancing.

How much can I borrow with a personal loan?

Some personal loan companies let you borrow $2,000 to $50,000; however, there are others that offer funding in amounts up to $100,000.

What happens if you pay off a personal loan early?

Most personal loans do not charge prepayment penalties, but you should check for this type of fee and other hidden fees before you apply.

How much will a loan inquiry drop my credit score?

According to myFICO.com, hard inquiries on your credit reports are only considered for credit scoring purposes if made in the last 12 months. Even then, the impact of a single hard inquiry is typically five points or less, and your score can bounce back within a few months.

The Bottom Line

The best personal loan companies can help you get the funding you need when you need it, and you can tailor your monthly payment and repayment term to your needs and goals.

That said, you’ll want to compare loan companies based on the interest rates they charge, in addition to the fees they charge (including hidden fees). Also, make sure that you wind up with a monthly payment that fits easily into your budget and that you don’t borrow more than you need.

Article Sources
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  1. Consumer Financial Protection Bureau. “What Is a Personal Installment Loan?

  2. LightStream. “Lending Uncomplicated.”

  3. Rocket. “Personal Loan Page.”

  4. myFICO. “What’s in My FICO® Scores?

  5. Board of Governors of the Federal Reserve System. “Consumer Credit—G.19.”

  6. LightStream. “Annual Percentage Rates (APR).”

  7. OneMain Financial. “Personal Loans for What You Need—and When You Need Them.

  8. OneMain Financial. “Loan Amounts and Fees Page.”

  9. myFICO. “Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO® Score?

  10. InCharge Debt Solutions. “How Multiple Credit Inquiries Affect Your Credit Score.”

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