The Pros and Cons of Personal Loans

Is a personal loan the right choice for your own financial needs?

Here, we’ll look at the pros and cons of personal loans so you can decide whether this option will help you.

What is a personal loan?

A personal loan is money borrowed from banks or lenders for various purposes, such as consolidating debt or covering unexpected expenses. With a personal loan, you receive funds directly and repay the loan in installments. There are a few different types of personal loans, such as unsecured personal loans (which require no collateral), secured personal loans (which do require collateral), variable-rate loans (which have interest rates that can vary), and fixed-rate loans (which have interest rates that do not change).

What makes personal loans unique?

Unlike more specialized loans such as mortgages or auto loans, personal loans can be used for almost anything. Common reasons for taking out a personal loan include paying for renovations to your home, paying surprise medical expenses, or financing an important life event like a wedding. 

But as with mortgages and auto loans, the personal loan amount you’re eligible for and what interest rate you’re offered will depend on factors like your income, the loan duration, the loan amount, and your creditworthiness.


Applying for Personal Loans

To apply for a personal loan, you must provide your lender with personal financial information, including your income. The lender will process your application, which includes running a hard credit inquiry, deciding whether you qualify for the loan and determining what loan amount you can borrow.

If you’re approved, you’ll receive your funds as a lump sum and will pay the loan back in monthly installments over a preset period.

Pros of Personal Loans

Because taking out a personal loan involves making consistent monthly payments for a certain period of time, you need to keep the pros and cons of a personal loan in mind as you decide whether it’s the right move for you financially. Here are some advantages that come with this type of loan:

Predictable payments

Personal loans are generally fixed-rate. That means your interest rate remains the same over the life of the loan, therefore your payments will be predictable from one month to the next. If you need to finance an emergency expense or home improvement, a personal loan is one way you can do that with predictable monthly payments.

Fast application

Personal loans tend to be processed quickly. Once you’ve provided all your information, depending on the lender’s underwriting process, your lender will know in short order whether you qualify for a loan.


While you can use your personal loan for nearly anything, it is important to know that most lenders do not allow personal loans be used to pay educational expenses like college tuition or used as a down payment on a mortgage.

Personal loans are some of the most flexible lending products in helping you cover your expenses and financial needs. With your personal loan, you’ll have the option of repaying your loan over a set period of time.

Build credit

Good credit is important when it comes time to financing a large purchase, such as buying a home. Building credit, however, can take years. One way to get started early is by taking out a smaller personal loan and ensuring you make the payments on time.

No collateral

Personal loans are typically unsecured and do not require collateral. This means that personal loans may have a higher APR than some secured loans, but it also means that your risk is limited. Still, you should remember that defaulting on a personal loan can have serious consequences to your credit.

Easy debt consolidation

If you can qualify for a personal loan with an interest rate that’s lower than the current interest rate of your debts, you can pay them back all at once in exchange for a single, more manageable monthly payment by consolidating those debts into a personal loan.

Cons of Personal Loans

Though personal loans offer many advantages, they also have drawbacks, and it’s crucial that you carefully weigh these downsides before committing to a personal loan.

Eligibility requirements 

Lenders will not offer you a loan unless you fit certain criteria for creditworthiness and income. Unfortunately, this means your options might be limited if you have poor credit or don’t meet the necessary income requirements.

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 credit inquiry, your credit score will temporarily decline by a few points. If you apply for multiple loans, these individual inquiries can accumulate and impact your credit score. Bear 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. Prepayment penalty may be owed when you pay your loan off before the end of the loan term. Late fees may be applied when you miss a payment or fail to pay your loan back by the end of the term. 

How to Decide if a Personal Loan is Right for You

With all this context in place, you should have some idea as to what you need to decide if you want to consider a personal loan. That being said, a lot will still depend on your unique circumstances, and there are a few scenarios in which a personal loan can be particularly helpful.

Emergency cash needs

Life happens fast, and unfortunately, you might suddenly find yourself facing large, unexpected expenditures. With their typically quick approvals, personal loans are helpful when you need access to a large sum of cash to handle an emergency like a serious illness or a natural disaster.

Strong borrower profile

The cost of a person loan will mainly rely on your creditworthiness, which has the most significant impact on the loan’s APR. If you have good credit, you will have access to lower interest rates, potentially making a personal loan a better, more affordable option than the alternatives.

Added value

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.

Individual details

Everyone’s circumstances are different, and you must factor that into your ultimate decision. Be sure to weigh the pros and cons of personal loans when deciding whether to assume responsibility for one.

Know the upsides and downsides of personal loans

Now that we've covered a few of the benefits and disadvantages of personal loans, you should feel more informed and empowered in deciding whether a personal installment loan will meet your financial needs.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

Disclosure: 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.

Additional Resources

  • Start your personal loan application now!

  • Learn how FICO® Scores are determined, why they matter and more.

  • Review financial terms & definitions to help you better understand credit & finances.