Pros of personal loans
Personal loans can come with many benefits, including:
Predictable payments
Personal loans often come with a fixed interest rate. That means the rate, and thus your monthly payment, will stay the same over the life of the loan. If you need to finance an emergency expense or home improvement, a personal loan can be an option to do that with predictable monthly payments.
Wide range of borrowing limits
In general, personal loans can offer a wide range of borrowing limits, from a few hundred dollars up to tens of thousands (or more). For qualified applicants, this can make them a viable source of funding for many purposes.
Flexibility
You can use your personal loan to pay for nearly anything, but there are limits. For example, lenders may prohibit personal loans from being used to pay educational costs, like college tuition. Still, personal loans are some of the most flexible lending products in helping you cover your expenses and financial needs.
Building credit
When you start repaying a personal loan, on-time payments can help you build credit, showcasing your reliability and general creditworthiness. Good credit takes time to build and is important when it comes to financing large purchases, such as buying a home.
No collateral
Personal loans are typically unsecured, meaning they don’t require collateral. This translates to a higher annual percentage rate (APR) than some secured loans, but it also means that your risk is limited. For example, you wouldn’t have to worry about losing your collateral if you miss payments. Even so, you should remember that defaulting on a personal loan can have serious consequences to your credit.
Cons of personal loans
Though personal loans offer many advantages, they can also have drawbacks. It’s important to carefully weigh these downsides before committing to a personal loan.
Eligibility requirements
To access a personal loan, you need to meet the lender's requirements, which can vary but typically include criteria for creditworthiness and income. Unfortunately, this means your options might be limited if you have a lower credit score or don’t meet the minimum income requirement.
Short-term credit dip
When you apply for a personal loan, lenders will conduct a hard credit inquiry into your credit report before approving you. Anytime a lending institution conducts a hard inquiry, your credit score will temporarily decline by a few points. Applying for multiple loans at once may impact your credit further. It’s important to keep this in mind as you go through the application process.
Penalites and fees
Personal loans may carry some fees and penalties that you should be aware of. For example, a late fee may be applied if you miss a payment. And there may be a prepayment penalty for paying off your loan before the end of the loan term, though this is uncommon.
Potentially higher APRs
Depending on what you’re using a personal loan for, you may find alternatives with lower APRs than personal loans. For example, auto loans typically offer lower APRs compared to personal loans. And if you have less-than-perfect credit, you may not be able to qualify for an APR on the lower end of a lender’s interest-rate offerings for personal loans.
How to decide if a personal loan is right for you
With all this context in place, you should have some idea of what you need to decide if you want to consider a personal loan. That said, a lot will depend on your unique circumstances. For example, if you can demonstrate strong creditworthiness, you may be able to qualify for a low APR and other favorable terms. That can make a personal loan a more affordable option than alternatives.
There are also a few scenarios in which a personal loan may be particularly helpful:
Accessing emergency cash
Life happens fast, and unfortunately, you might suddenly find yourself facing large, unexpected expenditures. With their typically quick approvals, personal loans may be helpful when you need access to money to handle an emergency like an unexpected home repair or a natural disaster.
Adding value to your assets
Since personal loans are often used for expenses like home improvements or upgrades, they have the potential to add value to your assets. This is worth thinking about if you plan to sell your home or property in the near future.
Saving money on existing debt
If you can qualify for a personal loan with an interest rate that’s lower than the current interest rates of your debts, you may consider using a personal loan to consolidate that debt, potentially saving money on interest. Plus, this would simplify your various payments into a single monthly payment.
Are personal loans bad?
Personal loans are a financial tool that can be used in many ways. Your situation and needs will dictate whether a personal loan makes sense for you. It’s important to make sure you can afford the monthly payments and are comfortable with making that commitment for the full loan term before taking out a personal loan.
Applying for personal loans
If, after considering the pros and cons, you decide that a personal loan makes sense for your needs, you may shop for a loan and apply. Typically, you must provide basic personal information, such as your name, address, Social Security number and income in your application. If approved, you’ll receive your funds as a lump sum either by direct deposit or a check by mail and can then pay the loan back in monthly installments over the preset period.
Citi offers unsecured, fee-free personal loans to qualified applicants. If you think you could benefit from a Citi Personal Loan, you can apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
