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When you need to borrow money, you could run up a balance on your credit cards and pay it off over time. And if you have a high enough spending limit, you may not even have to deal with the process of asking for a credit limit increase to get access to the money you need.
But borrowing via a credit card could mean paying a lot of interest on your debt. That’s because credit cards not only tend to charge high interest rates, but also, compound interest frequently so your balance grows even more. And so if you need money, a better bet may be to turn to a personal loan.
Discover: These personal loans are best for debt consolidation
More: Prequalify for a personal loan without impacting your credit score
A personal loan lets you borrow money for any purpose. And if you have great credit, you may find that you’re able to snag a competitive interest rate on a personal loan — and a much lower rate than what a credit card might charge.
Furthermore, personal loans are unsecured, so you don’t need to put up a specific asset as collateral on one. This means that not owning a home doesn’t have to be a barrier to borrowing.
During the fourth quarter of 2022, U.S. personal loan balances reached $222 billion, according to recent data by TransUnion. But while there are certainly benefits to taking out a personal loan, there are some drawbacks to consider, too.
The upside of borrowing via a personal loan
Personal loans are among the most flexible borrowing options you’ll find. When you take out a mortgage loan, you must use your proceeds to purchase a home. With an auto loan, you must use that money to finance a vehicle purchase. With a personal loan, you can use the proceeds for any reason you want, whether it’s to furnish your home, renovate your kitchen, or replace your failing roof.
The downside of borrowing via a personal loan
If you have terrific credit, qualifying for a personal loan may not be all that difficult. And there are plenty of lenders who offer personal loans to borrowers who don’t have the best credit. In that case, you’re likely to pay more interest than someone with great credit, but the option might still be available to you nonetheless.
But because personal loans let you use your proceeds for any purpose, you may end up borrowing money for something you should really be saving for in advance, like purchasing electronics or paying for a big vacation. And if you borrow for those purposes, you might then struggle to get a loan when you really need the money to do something like repair your car.
Also, because personal loans tend to come with competitive interest rates, you may be tempted to borrow extra. But remember, you’ll need to keep up with your loan payments, and if you don’t, you could face a host of serious consequences, including major damage to your credit score. So it’s important not to fall into that trap.
All told, it’s easy to see why personal loan balances grew so much in 2022. But if you’re thinking of taking one out, be sure to consider the pros and cons before moving forward.
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