Are Personal Loans Bad? Not Always

Personal loans are not always bad. If you work with a reputable lender, use the loan for the right reasons and can commit to paying it back, then a personal loan can be a smart option.

On the other hand, if the loan you’re considering comes with a triple-digit interest rate, and you have limited or unsteady means to pay it back, then a personal loan will do you more bad than good.

What is a personal loan?

A personal loan is money borrowed from a lender that you pay back with equal monthly payments, or installments, over a fixed period, typically two to seven years. You can get personal loans from banks, credit unions and online lenders.

In return for borrowing, you pay interest on the loan. Interest rates on personal loans range from about 6% to 36%. Borrowers with good to excellent credit (above 690 on the FICO scale) are more likely to qualify and receive a rate at the lower end of that range.

If your credit is bad, you can boost your chances of qualifying by building your credit and reducing your debt. There are some lenders that offer bad-credit personal loans, but expect higher rates.

When is a personal loan a bad idea?

There are a few instances when it’s better to avoid a personal loan:

It’s a no-credit-check loan: Lenders that don’t check your credit can’t accurately assess your ability to afford the loan. This means more risk for them and much higher interest rates for you. If your credit is bad, but you need to borrow, exhaust all other options first.

Managing debt is tough for you: A debt consolidation loan can ease your debt burden, but it requires that you use the loan to pay off your other debts and avoid taking on any more.

A good first step toward getting better at managing your debt is following a budget that accounts for needs, wants and debt payments.

You have cheaper alternatives: Even in an emergency, we always recommend taking a moment to consider alternatives to borrowing. If your credit is good, you may qualify for a 0% interest credit card. Medical debt can often be covered with a payment plan. Your employer may offer a cash advance on your paycheck. Take our quiz below to explore alternatives.

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