Personal loans offer a flexible way to access funds for various purposes, whether you’re consolidating debt or covering a significant expense.
July 23, 2026
Personal loans offer a flexible way to access funds for various purposes, whether you're consolidating debt or covering a significant expense.
But with so many financial products available, how do you know if a personal loan is right for you? In this guide, we'll discuss why people choose personal loans and share insights into when taking one out can be beneficial, and when you should consider an alternative. It helps to start by comparing personal loan lenders so you can see the rates and terms you might qualify for.
According to financial advisor Stephan Shipe of Scholar Financial Advising, personal loans work well for debt consolidation, emergencies, or large purchases when you have a solid plan to pay them back. However, he warns that high interest rates can be an issue, particularly for borrowers with lower credit scores, and that mismanaging these loans could lead to a debt spiral.
A personal loan is a type of loan that can help you consolidate outstanding debts, pay for home improvements, or help you access cash in a pinch. Personal loans typically have fixed interest rates, set monthly payments, and various term lengths to choose from.
Loans come in two main varieties: unsecured and secured. Most are unsecured, meaning approval is based solely on your income and credit score—no collateral is required. Secured personal loans, while less common, require you to back the loan with an asset like your home or vehicle but may offer lower interest rates in exchange.
The application process is typically straightforward and fast. Many lenders offer online applications with decisions in minutes, and if approved, you could receive funds in your account as soon as the next business day. However, actual approval times and funding speed can vary by lender and your individual circumstances.
People take out personal loans for many reasons, but a few uses come up again and again: consolidating debt, funding home improvements, covering emergencies, and financing big purchases. Here's a closer look at each.
Debt consolidation allows you to combine multiple debts into a single loan with one monthly payment. Through a personal loan, you can pay off various existing debts and replace them with a single, potentially more manageable obligation.
The primary advantage of consolidation through a personal loan often lies in the interest rate. If you qualify for a lower rate than your existing debts, you could save significantly on interest charges. For example, if your credit cards charge 18% interest annually, you might qualify for a personal loan at 10% instead—potentially saving you hundreds or thousands in interest charges.
Those figures track real-world averages. In mid-2026, the average credit card APR was about 22%, while the average rate on a two-year personal loan was about 12% (Federal Reserve).
However, consolidation isn't always the best choice. While lower monthly payments seem appealing, stretching out your repayment period could cost more in total interest—even at a lower rate. Before consolidating, compare the total cost over the loan's life and make sure you have a plan to avoid taking on new debt while paying it off.
Yes, a personal loan can be a practical way to fund renovations. Americans spend heavily on home improvements—about $500 billion a year across the US, according to Harvard's Joint Center for Housing Studies. That figure reached roughly $507 billion in the third quarter of 2025, so renovations clearly represent a major investment for homeowners.
While these projects require significant upfront capital for materials and labor, personal loans offer a way to finance improvements without depleting your savings. Many homeowners debate over HELOCs vs personal loans for their home improvement projects.
Personal loans are unsecured, meaning you won't need to use your property as collateral like you would with a home equity loan. You can complete renovations knowing your home isn't at stake if you fall behind on payments, plus benefit from competitive rates and fast approvals.
Some lenders also offer longer payoff terms on home renovation loans—up to 15 years in some cases—which can lower your monthly payments on bigger projects.
A personal loan can be a smart way to finance a big purchase. When facing major expenses like new furniture or appliances, many retailers will push their store-branded credit cards at checkout. While these cards seem convenient, personal loans can be a smarter financing choice, offering more flexibility and potential savings.
Personal loans typically come with lower interest rates than store cards and give you the freedom to choose your repayment timeline. This means you can select monthly payments that fit your budget while potentially paying less in interest over time. A personal loan can also help cover other large costs, such as buying a vehicle or paying for a move.
Yes, a personal loan is one option for urgent costs when your savings fall short. Life's unexpected costs can hit hard—whether it's a failing car transmission, a leaky roof, or an urgent medical procedure. While having an emergency fund is ideal, reality doesn't always match our financial plans.
Personal loans differ from credit cards or payday loans by offering fixed payments and typically lower interest rates. Most lenders can provide funds within one business day, making them a potential solution for essential repairs or medical bills that require immediate attention.
Personal loans typically have no restrictions on how you spend the money, meaning you can use them for vacations, weddings, or other leisure expenses. But should you?
While financing a vacation or wedding might be tempting, remember that you'll pay significantly more than the original cost. Any money you borrow will accumulate interest over years, substantially increasing the total expense.
For example, if you get a $5,000 personal loan with a 10% interest rate and a 5-year payoff term to pay for your vacation, you'll end up paying over $6,000 due to interest payments. Before using a personal loan for discretionary expenses, ask yourself if the added cost of interest makes sense for your long-term financial health.
Deciding whether a personal loan is right for you comes down to a few practical questions about timing, cost, your credit, and what you can afford. Before taking one out, consider these key factors:
When do you need the funds? If you need money quickly, personal loans can be an effective solution since most lenders provide funding within a few business days. However, if your need isn't urgent, consider alternatives like home equity loans which might offer better rates.
Is the interest rate lower than other options? There are many ways to fund projects and consolidate debt, so it's worth checking whether a personal loan's rate will actually save you money over the alternatives you're weighing.
Is your credit score good enough? Lenders typically reserve their best rates for borrowers with strong credit scores. Check your credit report and score before applying to understand what rates you might qualify for and whether you should improve your credit first.
Can you afford it? Before committing to a personal loan, ensure the monthly payments fit comfortably within your budget. Missing payments can result in substantial penalties and serious damage to your credit score, potentially affecting your financial options for years to come.
If you're not sure you'll qualify on your own, look for a lender that allows a co-signer or co-borrower. Adding a trusted friend or family member with a strong credit score and financial position can help you qualify, and may lead to better interest rates and loan options.
What a personal loan means for you depends on your credit, how quickly you need the money, and how long you want to spend repaying it. Here's how those factors change the picture.
If your credit is strong, you're more likely to qualify for the lower end of available rates, which makes a personal loan especially competitive against credit cards. If your credit is lower, expect higher rates, and consider whether improving your score first or adding a co-borrower could get you a better deal.
If your need is urgent, a personal loan's fast funding can be a real advantage, since many lenders deposit money within a business day. If your timeline is flexible, you have room to shop around, compare offers, or save toward the expense instead.
A shorter term means higher monthly payments but less total interest, while a longer term lowers your payment but costs more over the life of the loan. Match the term to what your budget can comfortably handle without stretching the balance out longer than you need to.
Personal loans can be smart tools for specific purposes, such as upgrading your home or getting out of high-interest debt. When used strategically—like boosting your home's value or lowering your existing debt costs—they can help strengthen your financial position.
However, think twice before using a personal loan for discretionary expenses like vacations. While tempting, you'll end up paying much more for these experiences through years of interest charges.
Before moving forward, take time to review your finances and shop around for competitive rates from different lenders. Most importantly, make sure you have a realistic plan for repayment. When you're ready, start by comparing offers from personal loan lenders, and before you apply, it helps to know what documents you'll need to apply for a personal loan.
A personal loan tends to make sense when it lowers your borrowing costs or covers a genuine need and you have a clear repayment plan. It's usually a poor choice for discretionary spending you could delay or save for instead.
Often, yes. In mid-2026, the average credit card APR was about 22%, while the average two-year personal loan rate was about 12%, according to Federal Reserve data cited above, though your actual rate depends on your credit.
Many lenders offer online applications with decisions in minutes and can deposit funds as soon as the next business day. Actual timing varies by lender and your situation.
Most personal loans can be used for almost any purpose, so lenders rarely restrict how you spend the money. Still, the purpose you list on your application can sometimes affect the rates and terms you're offered.
Depending on your goal, alternatives include a home equity line of credit, a credit card, or drawing on savings. If you're weighing options for paying down balances, our guide to debt consolidation can help you decide what fits.
This article was written by Jacob Wade, a personal finance expert and former enrolled agent whose work has been featured in Forbes Advisor, Investopedia, and Time. Our editorial team reviews and compares personal loan options across multiple factors to help you make an informed decision.
This article draws on public, primary sources rather than proprietary BestMoney research. We used the Federal Reserve's G.19 consumer credit release for average personal loan and credit card rates, the Harvard Joint Center for Housing Studies (LIRA) for US remodeling spending, and an interview with financial advisor Stephan Shipe of Scholar Financial Advising for expert guidance on when borrowing makes sense.
Federal Reserve G.19 Consumer Credit — average personal loan and credit card rates.
Harvard Joint Center for Housing Studies (LIRA) — US home remodeling spending.
Scholar Financial Advising — expert input from financial advisor Stephan Shipe.
Disclaimer: This article is for informational purposes only and should not be considered financial or legal advice. Consult a qualified financial expert or credit counselor to explore options best suited to your situation.
Jacob Wade is a personal finance expert at BestMoney.com, focusing on banking products, loans, and financial apps. His work has been featured in Forbes Advisor, Investopedia, and Time. A former enrolled agent with CPA firm experience, Jacob also shares his knowledge of credit card rewards and travel hacking.