Personal Loans for Everyday Needs: When They Make Sense and When They Don’t

Personal loans have become incredibly popular over the last few years, with Americans borrowing over $210 billion through them as of 2023. These are unsecured loans that you can use for almost anything, from medical bills to home repairs to consolidating credit card debt. Interest rates vary wildly based on your credit, ranging from around 6% for excellent credit to 36% for subprime borrowers. The loan amounts typically start at $1,000 and can go up to $50,000 or even $100,000 with some lenders. Repayment terms usually span 2 to 7 years, and you get a fixed monthly payment that doesn’t change, which makes budgeting easier than dealing with credit cards where minimum payments fluctuate.

Situations Where Personal Loans Actually Help

Debt consolidation is probably the most common use. If you’re carrying $15,000 across three credit cards at 22% interest and can get a personal loan at 10%, the math works in your favor. You’ll pay less interest and have one payment instead of three. Medical expenses are another big one. A $8,000 surgery bill with a payment plan through the hospital might charge you zero interest, but many hospitals only give you 12 months. A personal loan stretches that to 5 years if you need lower payments. Home repairs that can’t wait also make sense. If your HVAC system dies in July and you don’t have $6,000 lying around, a personal loan beats suffering through summer heat or putting it on a 24% APR credit card.

When Personal Loans Are a Terrible Idea

Taking out a personal loan for a vacation is usually dumb. You’re paying interest on memories, and that $4,000 trip ends up costing $5,200 by the time you’re done paying it off. Same thing with buying furniture or electronics you don’t urgently need. Retailers love offering “no interest for 24 months” deals that are actually better than personal loans if you can pay it off in time. Just be careful because if you miss that window, the deferred interest hits you all at once. Another bad move is using a personal loan to buy a car when auto loans exist with lower rates since the car itself serves as collateral.

The Credit Score Reality Check

Your credit score determines everything with personal loans. Someone with a 750 score might get approved at 7.5% while someone with a 620 score faces 28%. That difference is massive. On a $10,000 loan over 5 years, the person with good credit pays about $2,000 in interest total. The person with fair credit pays over $7,500. Some lenders won’t even approve you below 580, and those that do charge predatory rates that trap you in debt. Before applying, check your score for free through your credit card company or sites like Credit Karma. If it’s below 650, spending a few months improving it could save you thousands.

Reading the Fine Print Everyone Skips

Origination fees are sneaky. Some lenders charge 1% to 8% of the loan amount upfront, which gets deducted from what you receive. Borrow $10,000 with a 5% fee and you only get $9,500, but you owe the full $10,000 plus interest. Prepayment penalties are another trap, though they’re less common now. Some lenders charge you for paying off the loan early because they lose out on interest. Always ask about both before signing.