Key insights:
- A personal loan can be a useful way to help cover a large planned or unplanned expense
- There are many benefits of personal loans, such as predictable monthly payments and fixed interest rates, but there may also be risks
- A Citi® Personal Loan may help you meet a wide range of personal financial goals
A personal loan is a sum of money you borrow from a bank or lender and repay in fixed monthly installments. The money may be used for various purposes, from consolidating debt to covering an emergency expense to funding a wedding. But is a personal loan the right choice for your own financial needs?
Let's explore the pros and cons of personal loans so you can decide whether this option will help you.
Pros of personal loans
Personal loans can come with many benefits. These may include:
Predictable payments
Personal loans often come with a fixed interest rate. That means the rate and your monthly payment will stay the same over the life of the loan. Predictable payments can make it easier to manage your budget.
Potentially high borrowing limits
Depending on the lender and your creditworthiness, you could be approved for anywhere from a few hundred dollars up to $30,000 or more.
Flexible uses
There are many types of personal loans, allowing you to cover a wide range of costs. That said, there may be limits. For example, some lenders may prohibit personal loans from being used to pay educational costs, like college tuition. Still, personal loans are typically very flexible credit options that can help you cover many kinds of expenses.
Building credit
When you start repaying a personal loan, on-time payments can help you build credit, showcasing your reliability and general creditworthiness to future lenders. Good credit takes time to build and is important when it comes to financing large purchases, such as buying a home. The better your credit, the more likely you are to qualify for the best interest rates.
No collateral required
Personal loans are typically unsecured, meaning they don’t require collateral. This may translate to a higher annual percentage rate (APR) than some secured loans, but it also means that your risk may be lower because you wouldn’t have to worry about losing your collateral if you default. Even so, you should remember that defaulting on a personal loan can have serious consequences, both legally and financially.
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 eligibility requirements, which can vary but typically include criteria for creditworthiness and income. 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, the lender will conduct a hard credit inquiry before approving you. Anytime a lender conducts a hard inquiry, your credit score will temporarily drop 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.
Penalties 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. Many lenders also charge origination fees at the beginning of the loan.
Potentially high interest rates
If you have less-than-perfect credit, you may not be able to qualify for an APR on the lower end of the range of a lender’s offerings for personal loans. And depending on why you’re borrowing money, you may find alternative financing options with lower APRs than a personal loan. For example, if you’re buying a car, auto loans typically offer lower APRs compared to personal loans.
Is a personal loan right for me?
Whether a personal loan is right for you will depend on your unique circumstances. Think about how much you need to borrow, whether you can afford the payments, and whether other types of credit might be a better fit.
Your reason for borrowing also plays a role. Here are some scenarios in which a personal loan may be particularly helpful:
- Accessing emergency cash: Life happens fast, and unfortunately, you might suddenly find yourself facing a large, unexpected expense. Since personal loans typically have quick approval timelines, they may be able to help you cover certain costs such as unexpected home repairs.
- Adding property value: Since personal loans are often used for expenses like home improvements or upgrades, they may have the potential to add value to your assets.
- Consolidating debt: If you can qualify for an interest rate that’s lower than the current interest you’re paying for other debts, using a personal loan for debt consolidation could help save money and simplify your monthly payments.
Applying for personal loans
If you decide that a personal loan makes sense for your needs, many lenders allow you to apply online. 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. Then, you’ll pay the loan back in monthly installments over the amount of time listed in your loan agreement.
Citi offers unsecured, fixed-rate personal loans to qualified applicants. If you think you could benefit from a Citi Personal Loan, you can apply online today.
FAQs about personal loans
When does a personal loan make sense?
When you borrow within your means and manage your loan responsibly, a personal loan can be a helpful financial tool that can be used in many ways. Your situation and needs will help you determine 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 borrowing.
How much would a $5,000 personal loan cost a month?
The cost of a personal loan depends on the loan term and the APR, which accounts for both the interest rate and fees. A personal loan calculator can help you determine the monthly cost of a specific loan. For example, a $5,000 personal loan with a 36-month term and 10% interest rate would have a monthly payment of $161.34.
What are the risks of a personal loan?
Like any loan, personal loans do carry risks. If you fail to repay the loan, you could be charged late fees and penalty fees, and it could have a negative impact on your credit. You could also face legal consequences. If the loan is secured by collateral, you may risk losing your collateral if you can't repay the loan.
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.
