The Pros and Cons of Personal Loans

It’s not unusual to need access to more cash than you have on hand from time to time. In those situations, a personal loan can be an excellent option. But is a personal loan the right choice for your situation?

Here, we’ll take a look at personal loan pros and cons so you can decide whether this option is right for your financial needs.

What is a personal loan?

A personal loan is one in which you can receive the funds by direct deposit into a checking account or receive by check, and repay the loan in installments. There are a few different kinds 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 on your home, paying surprise medical expenses, or financing an important life event like a wedding. 

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

Applying for Personal Loans

If you’ve ever gotten a credit card, applying for a personal loan will be familiar. You must provide your lender with your personal financial information. 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 for which you’ll be approved. 

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

Pros of Personal Loans

Because taking out a personal loan involves the responsibility of making consistent monthly payments for up to five years, you need to keep the benefits and risks 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

As mentioned, personal loans are generally fixed-rate, and that means your payments will be stable and 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 steady, consistent monthly payments.

Fast application

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


Though some lenders will put restrictions on how you use a personal loan, you can use your personal loan for nearly anything in many cases. It is important to know that personal loans cannot be used for paying off educational expenses like college tuition or paying a down payment on a home.

This means that 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 longer period of time with convenient, simple installments.

Build credit

Having a good credit score is important when it comes time to make 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 making sure you make the payments on time.

No collateral

Personal loans are typically unsecured and do not require any 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 for your credit score.

Easy debt consolidation

If you can qualify for a personal loan with an interest rate that’s lower than the average interest rate of your current 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. 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

Relatedly, many lenders will do a hard credit inquiry before approving you for a personal loan. Anytime a lending institution conducts a hard credit check, there’s a temporary decrease in your credit score. If you’re shopping around for a personal loan, these individual hits can negatively affect your creditworthiness. Bear this in mind as you go through the application process.

Higher penalties and fees

Personal loans may carry two major fees that you should be aware of. Prepayment fees may be owed in the event that you pay your loan off too early, and penalty fees may be assessed when you pay your loan back too late. 

Taking on a loan involves a commitment to making monthly payments over a period of years, so both prepayment and penalty fees have to be accounted for when considering your long-term budget.

How to Decide if a Personal Loan is Right for You

With all this context in place, you should have what you need to decide if you want to pursue 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 quick approvals, personal loans can be an enormous help if you need immediate access to a large sum of cash to handle an emergency like a serious illness or a natural disaster.

Strong borrower profile

The expensiveness of a personal loan will depend in large part on your creditworthiness, as this is the factor that affects your loan’s APR the most. If you have a good credit history you will have access to lower interest rates, potentially making a personal loan a better, more affordable option than the alternatives.

Added value

Given that personal loans are often used for things like improvements or upgrades to a home, they have the potential to add value to your assets. This is worth thinking about if you believe you might sell a home or a 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 your own situation when deciding whether to assume the responsibility of a personal loan.

Know the upsides and downsides of personal loans

Now that you’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

  • Alt Text

    Start your personal loan application now!

  • Alt Text

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

  • Alt Text

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