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Personal Loans

Are Long-Term Personal Loans Ever a Good Idea?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The importance of having a rainy day fund can’t be overstated — you’re sure to encounter a storm at some point. While our insiders suggest setting your target at a minimum of three to six months’ worth of expenses, actually doing so can be a slow climb. This is especially true if you’re splitting your efforts between paying off debt. For many, a trip to the emergency room or a stint of unemployment is enough to seriously rock the financial boat.

That’s where long-term personal loans come in. Like any type of financing, they come with both benefits and risks. But if used wisely, they could potentially rescue you from a financial nightmare.

What is a long-term loan?

Personal loans are doled out by lenders and, unlike credit cards, are not revolving lines of credit. When we say “long-term” personal loans, we’re referring to loans that stretch beyond the one-year mark. Some may last only 12 months, while others can take a decade or more to pay off.

The most important thing to remember about personal loans is that the interest rate, monthly payment and payoff timeline are all fixed, meaning there’s virtually no wiggle room when it comes to how much you have to pay every month. In other words, when you sign on, you’re committing to this bill for the long haul. This could be taken as either a pro or a con, depending on how you look at it.

On the one hand, the fixed payment keeps the finish line in sight. Credit cards, on the other hand, give you the oh-so-tempting option of just paying the minimum, which stretches out the life of the loan, resulting in you paying more in interest over the long term. On the flip side, if you stumble upon financial hard times, having the ability to make lower monthly payments can be a godsend.

That said, long-term personal loans can be used for just about anything — from consolidating debt to seeing you through a financial emergency. Since the money is typically deposited straight into your bank account, you can use it however you wish. Of course, they don’t come without some strings attached.

Let’s break down the fees and rates for personal loans

For starters, personal loans are considered unsecured debt.

“Unlike your mortgage or an auto loan where you’re leveraging an asset (your home or your car) as collateral, personal loans are attached to no such security,” Pamela Capalad, certified financial planner and founder of Brunch & Budget, tells MagnifyMoney.

“As such, lenders understandably see them as being inherently riskier,” she added.
“This is precisely why you can expect strict repayment terms and potentially higher interest rates.”

The APR may not stand alone. In some cases, you could be hit with an origination fee to the tune of 1% to 6%. Some companies will also try and sell you insurance or other expensive, unnecessary products with these loans, says Lynn Ballou, certified financial planner and CFP Board ambassador.

“And if they’ve front-loaded that loan with extra interest or charged you an origination fee, that’s actually costing you quite a bit more than if you’d just looked for a less expensive option,” she added.

In other words, borrowers beware. Before signing on the dotted line, be sure to read carefully through the terms and fees. Ballou then suggests running the numbers through an independent loan calculator to make sure it’s actually a good deal for you. After factoring in the interest rate and potentially an origination fee, would it be less expensive to go with a different financing option? (We’ll explore this shortly.) Also, is the monthly payment within your budget? These are make-or-break questions to ask yourself before pulling the trigger.

When a long-term personal loan makes sense

Now that we’ve picked apart the nitty-gritty details, let’s explore when a long-term personal loan might be a good idea. A personal loan can be a powerful consolidation tool for those struggling to eliminate high-interest debts — assuming you snag a better APR. In addition to saving money, you’ll have a clear timeline in place and the convenience having just one monthly payment.

When it’s the cheapest borrowing option

“Personal loans actually have some great interest rates, especially now since the market has gotten really competitive over the last few years,” said Capalad. “With a long-term loan, you’ll probably end up paying off your debt faster, or at least about the same time as doing some sort of debt snowball method.” The debt snowball method involves ordering debts from smallest to largest balances and tackling the smallest debts first.

As far as rates go, the better your credit score and higher your income is, the better chances you’ll secure a good rate. If you have poor credit, however, you should expect to see a higher rate. Personal loan rates can eclipse credit card rates, getting as high as 35.99%.

Capalad does offer another word of warning. If you’re using a personal loan to consolidate debt, you have to be really disciplined to put those credit cards away. When people use the loan to get their cards down to what Capalad calls “that nice $0 balance,” it can be extremely tempting to run up the balances again. That said, if you’re disciplined and committed to using a long-term personal loan to get on stronger financial footing, it can represent a great solution.

Debt consolidation aside, sometimes it simply works out better from a dollar-and-cents perspective. If you find a personal loan with no origination fee and a reasonable APR, it may very well be less expensive than getting a cash advance via a credit card, especially since many financial institutions charge a 1% to 5% cash advance fee.

“Sometimes a personal loan is actually the least expensive option available, but sometimes it’s also the only option available,” added Ballou. “Not everyone has something to collateralize, like equity in their home to unlock a home equity loan.”

When a long-term personal loan doesn’t make sense

If you’re stuck between a financial rock and a hard place, being hit with costly fees or high interest rates is certainly better than filing for bankruptcy or defaulting on your bills. The good news is that doing some light research might reveal a different option that’s a better fit than a personal loan.

Begin by asking yourself what you need this loan for. Is it to see you through a financial emergency that’s unlikely to happen again? Or is it to take a last-minute vacation? That may sound obvious, but it’s a legit question to ask because it’s all about trade-offs here.

Let’s say you take out a five-year $5,000 personal loan at 19.5% APR. If you crunch the numbers using our personal loan calculator, it translates to a $131 monthly payment — you’ll also spend an additional $2,865 on interest. Is that really worth it for a family vacation? Perhaps not.

You might, on the other hand, feel like it’s your best option if you’re swimming in credit debt with higher interest rates and need a debt consolidation loan.

The scenario plays out better if you have a fully-funded emergency savings.

“If you have a steady job and you’re at that three- to six-month level, and the trip is extremely important to you because it’s for, let’s say, your best friend’s wedding, you’re better off dipping into your emergency fund and then paying yourself back — but you have to be extremely committed to topping it back off as soon as possible,” said Capalad.

When your cash reserves are running low and a long-term personal loan isn’t your best option, it’s time to explore the financial alternatives. (We’ll dive deeper into your options below.)

Getting a long-term personal loan

Ready to move forward with a long-term personal loan? Here’s what should be on your radar:

Checking your credit score

Whenever you’re seeking new financing, your credit score is perhaps the most important factor. This number basically sums up how creditworthy you are, which is what lenders care about. The higher your score, the better interest rates and financing options you’ll get. Here’s how FICO, America’s leading credit reporting agency, breaks down this all-important three-digit number. (There are a number of ways to access your credit score for free.)

This number is actually a reflection of what’s on your credit report, which sums up your credit history. Experian, TransUnion and Equifax (the three major credit bureaus) each generate their own report, which you can pull for free once a year at Doing so is vital to maintain a healthy credit score. What’s more, finding and disputing an error on your report may give your score a significant boost.

Where to get a long-term personal loan

Applying for a long-term personal loan isn’t all that different from locking down one with a shorter term. The internet has certainly streamlined the process. LendingTree, which is MagnifyMoney’s parent company, offers a way to compare loans from top lenders like BestEgg, Avant, LendingClub and more. Here, you can plug in a few pieces of information and possibly get quotes in a matter of seconds based on your credit score. It’s a soft credit pull, which won’t hurt your credit, but just know that when you officially apply with a lender, it will count as a hard inquiry.

Just be sure to compare rates as no two lenders are the same. Let’s say, for instance, your credit score sits at 660 and you’re looking to remodel your kitchen for $20,000. Short of a hard credit pull, here are some instant quotes:



Credit Req.


Minimum Credit Score


36 to 84


Origination Fee

No origination fee


on LendingTree’s secure website

Discover is a financial services firm that offers credit cards, deposit accounts and personal loans. ... Read More



Credit Req.


Minimum Credit Score


24 to 60


Origination Fee

0.00% - 5.00%


on LendingTree’s secure website

Payoff is a financial services firm that offers personal loans mainly to help consolidate credit card debt.... Read More


Up to 5.99%

Credit Req.


Minimum Credit Score


36 or 60


Origination Fee

0.99% - 5.99%


on LendingTree’s secure website

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People looking for a process that is fast and straightforward can’t go wrong when applying through Best Egg for a personal loan. ... Read More

*The Annual Percentage Rate (APR) is the cost of credit as a yearly rate and ranges from 5.99%-29.99%, which may include an origination fee from 0.99% - 5.99%. Any origination fee on a 5-year loan will be at least 4.99% and is deducted from loan proceeds. The APR offered will depend on your credit score, income, debt payment obligations, loan amount, loan term, credit usage history and other factors, and therefore may be higher than our lowest advertised rate. Requests for the highest loan amount may resulting an APR higher than our lowest advertised rate. You need a minimum 700 FICO® score and a minimum individual annual income of $100,000 to qualify for our lowest rate.

Best Egg loans are unsecured personal loans made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC. Equal Housing Lender. "Best Egg" is a trademark of Marlette Funding LLC. All uses of "Best Egg" on this site mean and shall refer to "the Best Egg personal loan" and/or "Best Egg on behalf of Cross River Bank, as originator of the Best Egg personal loan," as applicable. Loan amounts generally range from $2,000-$35,000. Offers up to $50,000 may be available for qualified customers who receive offer codes in the mail. The minimum individual annual income needed to qualify for a loan of $50,000 is $130,000. Borrowers may hold no more than two open Best Egg loans at any given time. In order to be eligible for a second Best Egg loan, your existing Best Egg loan must have been open for at least six months. Total existing Best Egg loan balances must not exceed $50,000. All loans in MA must exceed $6,000; in NM, OH must exceed $5,000; in GA must exceed $3,000.

Borrowers should refer to their loan agreement for specific terms and conditions. A loan example: a 5–year $10,000 loan with 9.99% APR has 60 scheduled monthly payments of $201.81, and a 3–year $5,000 loan with 5.99% APR has 36 scheduled monthly payments of $150.57. Your verifiable income must support your ability to repay your loan. Upon loan funding, the timing of available funds may vary depending upon your bank's policies.

To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you.

As you can see, there’s a pretty wide gap when it comes to interest rates. The good news is that the longer the term, the shorter the monthly payment — but you’ll ultimately pay more in interest over the long haul. For example, let’s pretend you lock down that $20,000 loan with no origination fee and an APR of 16%. Now let’s compare what happens when we tweak the repayment timeline:

Payoff Timeline

Monthly Payment

Total Interest Paid

60 months



40 months



24 months



There are a lot of moving parts here, which is why reading the fine print is vital. Before we jump into that, let’s talk about getting pre-qualified.

Getting pre-qualified for a personal loan

It’s probably a term you’ve heard before, but let’s unpack what it actually means. Pre-qualification utilizes what’s known as soft credit pulls as opposed to hard inquiries. Doing this does not impact your credit, making it much easier to shop around for the best deals. Soft inquiries essentially give lenders a little sneak peek of your credit. Once you pull the trigger on a loan, the bank will then do a deep dive by pulling your full credit report. (FYI, hard credit inquiries typically only shave a few points off your score, depending on your overall credit health, and you’ll bounce back relatively quickly if you keep up with on-time payments.)

Applying for a personal loan

Once you’re ready to formally apply for a long-term personal loan, you’ll need to gather up some documents. According to Ballou, this typically includes:

  • Photo ID
  • Proof of income and employment
  • Bank statements
  • Possibly a copy of a W-2 or tax return as proof of past income

Once the application process is in motion, the next step is approval, but Ballou says you could be denied if the lender sees you as a credit risk. Having bad credit, a short credit history, unreliable income or unsteady employment could all work against you.

Read the fine print

Before making the commitment, thoroughly read through all the terms and fine print. Here are some helpful questions to ask yourself:

  • Do you really need this loan? If it’s a true financial emergency, the answer might be yes. Otherwise, think long and hard before going all in.
  • Can your budget comfortably absorb the monthly payment? Remember, personal loans are locked in; you’re on the hook for that payment every month.
  • Is there an origination fee? Run the numbers and also factor in the APR. How much will your loan actually cost you when all is said and done? Is there a cheaper alternative? (We’ll jump into this in the next section.)
  • Are you okay with the repayment timeline? Think about your long-term financial goals. If, say, you’d love to save for a down payment on a house within the next five years, will this loan impede your ability to do so?
  • Is a prepayment penalty hiding in the contract? This could make it costly to pay off your loan ahead of schedule.

Alternatives to a long-term personal loan

Depending on your situation, a personal loan may very well be your cheapest option. If not, you’re not out of luck. Here are some alternatives worth exploring:

Home equity loans & lines of credit

Home equity loans (HELs) and home equity lines of credit (HELOCs) both use your home as collateral. You’re basically borrowing against the equity you have in your home by way of a secured loan or credit line. To get the best rates, you’ll need a decent credit score (ideally 660 and up) and at least 15% equity in your home. You also don’t want your debt-to-income ratio to exceed the 43% mark. One other crucial point: if you default on your payments, the bank could seize your home, so make sure you’re really comfortable moving forward.

Cash-out mortgage refinancing

A cash-out refinance lets you borrow additional cash to use as you wish. You could also tweak the terms, like extending to a longer-term loan, to lower your monthly payment and give your budget some breathing room. This, of course, will keep your mortgage debt alive and well for a longer period of time, and there may be fees, but in the short term, it may be your least expensive option.

Balance transfer credit cards

Seeking a personal loan to consolidate debt? Utilizing balance transfer offers may be a more strategic way to go. This is when you jump on low- or no-interest promotional APR offers to pay off your existing balances. Then you knock out the new balance before that teaser introductory period ends.

“If you can aggressively pay down the debt, then you can save a lot of money, especially if you have a lot of debt,” said Capalad.

Just be sure to read the fine print. There’s usually an initial fee that could be as high as 4%. And once the promotional period ends, your APR may skyrocket. This option really only makes sense if you can eliminate the balance within that time. Also, most banks won’t let you transfer debt from one card to another within the same bank.

Traditional credit cards

Your financial emergency may cost you less if you finance it with a traditional credit card, especially if the interest rate is reasonable and you’re able to accelerate your payments. While some personal loans will hit you with a prepayment penalty, you’re more than welcome to pay more than the minimum balance on a credit card. Here’s a simple credit card debt calculator to help bring the numbers into focus.

Borrowing from family or friends

It may bruise your pride, but borrowing cash from loved ones just might save you from financial ruin. (According to LendingTree research, 94.5% of people surveyed said they wouldn’t charge interest on a loan to a family member.) If you’re face-to-face with a true emergency, tap into your personal network to see what options may be available. You can work together to determine the terms and even draw up a contract if it gives your benefactor some peace of mind.

The Pros and Cons of Long-Term Personal Loans

Let’s recap, shall we?


  • Long-term personal loans translate to on-the-spot cash that’s typically deposited right into your bank account, which you can then use for whatever you want.
  • If you routinely make on-time payments, you’ll end up boosting your credit score in the long term.
  • Using personal loans to consolidate debt could save you big time in interest.
  • They’re good for folks who don’t have something to collateralize, like home equity or a car.


  • The monthly payment and payoff timeline are fixed, and there’s no wiggle room. If you miss it, you’re in default, which could do a number on your credit score.
  • Depending on your credit score, you may not be eligible for a reasonable APR. This could cost you.
  • Your loan may come with a prepayment penalty.
  • Making this monthly payment over a long period of time could impact your ability to save for other financial goals.
  • Opting for a long-term loan over a short-term one means you’ll ultimately shell out more in interest payments.

The bottom line

Moving forward with a long-term personal loan really comes down to your individual situation. The big idea here is to choose the least expensive financing option.

Using credit to live beyond your means is one thing, but debt that gets you to a better place and adds value to your life is another. If a long-term personal loan can help see you through a financial emergency relatively unscathed, it might be worth taking on some new debt.

As Ballou aptly put it: “The cost may be worth what it’s giving you.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here


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Here’s Why You Should Avoid Cosigning a Loan for a Friend

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

no credit loans

You’re in a tricky situation: your friend, who you love and care about deeply, has come to you asking for your help getting a loan that they desperately need. You know the loan could benefit your friend, but you’re also unsure of the risks behind cosigning a loan.

The most important step you can take is to learn why cosigning a loan for a friend is rarely a good idea. That way, you can understand why you probably should avoid it.

Should you cosign a loan for a friend?

In general, you may want to avoid cosign a loan for a friend. Here’s why:

  • You become legally responsible for the loan. In the eyes of the lender, the full loan amount is 100% yours. That means if your friend doesn’t make payments, the two of you will be held responsible.
  • Your credit score could be affected. Should your friend miss even one payment, your credit score could be negatively impacted since the loan is considered to be in your name too. And if the borrower defaults on the loan completely, it could impact your credit score even more.
  • You could damage your friendship. Consider the risks to the relationship with the person you are cosigning a loan for if they are unable to pay back the loan. Is the risk of ruining your friendship worth it?
  • You could lose personal property. If a loan — such as a personal loan — requires any collateral, such as your car, house or other personal asset, you are at risk of losing your property should your friend default on the loan.

Reasons why you may or may not choose to cosign a loan

Here’s a more comprehensive look at reasons why you might choose not to cosign a loan:

  • You can’t afford the loan. You should not take the risk on of cosigning a loan unless you can afford to pay the loan in its entirety. Otherwise, you could liable in court or even have your assets seized as part of your state’s collection practices.
  • You need a loan for yourself. If you know you will need your own loan soon, cosigning a friend’s loan could prevent you from being eligible for a loan for yourself.
  • You’re concerned about your credit score. If you’ve had a history of bad credit, are trying to build up your own credit or just don’t want to see your credit score negatively affected, you need to be aware that cosigning a loan could hurt your own credit score if your friend misses payments or defaults on the loan all together.
  • Your friend has a history of bad financial decisions. You should know why your friend needs a loan. It’s within your right to decide that you won’t cosign a loan if you don’t agree with how they’ll use loan funds. If your friend tends to rack up debt, you’re also free to explain to your friend that you don’t feel confident they need the added debt.

That being said, there may be a few circumstances where it is acceptable to cosign a loan for a friend. For example:

  • You can afford to pay the loan completely. If you cosign a loan, you are agreeing to be responsible for the loan amount in the event that your friend is unable to pay it. So, if you can afford to pay off the entire loan amount and are willing to do so, you could cosign a loan with less risk of hurting your own finances. Aside from the money you’d be out for the loan amount, of course.
  • The loan is for both of you. If you are purchasing something together, cosigning a loan might be a logical move, as you will both be utilizing the item or asset. For family members, a parent might choose to cosign a loan so their child could potentially consolidate student loan debt at a lower interest rate.
  • You’re willing to take on the risk. Maybe you feel like your friend has no other options, this is a necessary step and you are fully aware of the risks involved. In that case, cosigning a loan is a personal decision that only you can make.

How to protect yourself when cosigning a loan

If you do decide to cosign a loan with a friend or someone else, you should also take steps to protect yourself as much as possible before the loan is enacted. You can minimize your risk by taking actions such as:

  • Don’t put down personal assets as collateral. If you’re willing to cosign on a loan, you shouldn’t wager more than that. Using your home, car or other personal asset as collateral only increases your risk.
  • Establish expectations in advance. You should sit down with your friend to establish expectations for the loan and repayment. It’s helpful if you can set out a plan in writing about the consequences if your friend misses payments or is unable to fully repay the loan.
  • Stay on top of the loan. Although it is recommended that you keep close tabs on the borrower to ensure that they are repaying the loan on time each month, you could also ask the creditor to inform you of any missed or late payments automatically. If the lender has an online system, you and your friend could also share the account information. That way, you could easily log into your account to review payment information.
  • Try negotiating loan terms. Rules will vary by lender and state, but you may be able to negotiate what you’re responsible for as a cosigner, such as limiting your liability to the loan principal balance instead of the full principal and interest amount. You can also try to negotiate responsibility for late fees, attorney fees or accrued court costs.

Other ways of helping your friend

Outside of cosigning a loan for your friend, there may be other ways that you can help, such as:

  • Assisting with a down payment. Perhaps you can’t afford to take on the risk of cosigning an entire loan for your friend, but you may be able to help them put together a down payment so that they may qualify for a conventional loan.
  • Lend them the money directly. To ensure that you would not be legally responsible for your friend’s debt and to avoid possible damage to your own credit score, you could consider lending your friend the money they need directly, either as a lump sum or in installments. It is advisable to get all loan terms in writing and to have the loan contract notarized if you do choose to DIY a loan.

The bottom line

Although you may want to cosign a loan with a friend to help them, taking on the legal responsibility of someone else’s debt is usually not a good idea for most people. Agreeing to become a cosigner means you run the risk of being liable for the loan amount and the possibility of your own credit score taking a negative impact.

You should carefully consider the risks you are willing to take and take steps to minimize them before agreeing to cosign a loan for a friend. In most cases, unless you can fully afford and are willing to pay off the entire loan amount, the cons do outweigh the risk of cosigning on a loan for a friend.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Chaunie Brusie
Chaunie Brusie |

Chaunie Brusie is a writer at MagnifyMoney. You can email Chaunie here


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Should You Use a Personal Loan to Build Credit? What to Consider

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

checking credit score

If you’ve been trying to build up your personal credit, you may have considered using a personal loan. Taking out a personal loan could show creditors that you can responsibly handle different kinds of debt and follow the terms to which you and your lender have agreed.

But how successful you are depends on your ability to pay the loan back within the given term limits. Here’s what you should consider before taking out a personal loan to build credit.

Pros vs. cons: Using a personal loan to build credit

There are both pros and cons to taking out a personal loan in an attempt to increase your credit score:


  • Add to your credit mix: A personal loan could help you diversify your credit mix, which accounts for 10% of your FICO score.
  • Stay current on payments: You could use a personal loan to refinance a debt or consolidate debts to a lower interest rate. Doing so could help ensure you stay current on payments, which positively impacts your credit.
  • May not have to put down collateral: An unsecured personal loan doesn’t require you to put up collateral to secure the loan. That means your house or other assets can’t be taken away if you default.
  • Lower your credit utilization ratio: A personal loan can also lower your credit utilization ratio if you pay off your credit card balance with your loan and keep the card open. Credit utilization is important factor in your FICO score, and it is basically the amount you owe divided by the total amount you have available to you. Personal loans don’t count toward it.


  • Fees, fees, fees: Depending on your credit score, you could be paying hefty interest fees over the length of the loan, in addition to any other fees your lender charges, such as prepayment penalties, late fees and origination fees.
  • Could increase your debt-to-income ratio: Taking out a personal loan could change your debt-to-income ratio. This could make future lenders less likely to let you borrow funds until some, or even most, of your personal loan is paid off.
  • Strict payment schedule: Personal loans are often issued for a period of between 24 to 60 months and offer little flexibility when it comes to adjusting payments. So if you lose your job or face other financial struggles, your lender may be unwilling to work with you to reduce or delay payments.

Is using a personal loan to build credit right for you?

A personal loan might make sense for you if your goal is to diversify your credit mix or lower your credit utilization ratio by paying off a credit card. It’s also a good option if you plan to use the funds at a lower interest rate to pay off other debt that’s charging you a higher interest rate.

A personal loan to build credit might not be a good option if you’re already struggling with paying off debt, if you have no prior credit history or if you could get a credit card with a lower rate of interest instead. If you can’t get a reasonable interest rate, a personal loan might not be a good choice, said David Gokhshtein, a New York-based member of the Forbes Finance Council.

“In most cases, people in this scenario already have lower credit scores, leading to very high interest rates they could be paying off indefinitely,” he said. “If the debt gets sent to a collection agency, it will further damage the person’s credit score.”

That said, it’s important you have a clear picture of your financial situation. Consider the following questions:

  • Is your credit score good enough to qualify for competitive interest rates?
  • Can you afford the cost of a personal loan?
  • Is taking out debt and repaying it with interest worth it to build your credit?
  • Do you have a good use for the funds?

Answering these questions could help you decide whether or not to move forward with this option.

How to take out a personal loan

The first thing you should do if you decide to get a personal loan is to check your credit score. A FICO score of 700, on a range that spans 300 to 850, indicates you have good credit and would be likely eligible for a variety of loan offers, including a personal loan at a reasonable rate of interest. Because FICO scores are seen as an accurate reflection of your creditworthiness, lenders rely on them in 90% of all decisions.

You’ll want to research your options for lenders before committing to a loan, as well. You can use MagnifyMoney’s personal loan marketplace to compare lenders. You may also look to local banks or credit unions.

If possible, apply for preapproval from your top lenders of choice. Preapproval will allow you to see rates and terms you might qualify for with a soft credit check, which won’t affect your credit score.

Consider the following when weighing your loan options:

  • Rates
  • Fees
  • Conditions
  • Lender perks, such as support in case of job loss

Once you decide on a lender, you can submit to a hard credit check to see your final rates and terms. Depending on the lender, you could get loan funds within a few business days.

Others strategies to improving your credit

Consider the following ways to build credit without accumulating any additional debt:

Get a credit builder loan. With this type of loan, the money you borrow is deposited into an interest-bearing account. As you make payments on the debt, your payments are reported to the credit bureaus. Once you pay off your debt, the loan funds and the interest they earned are released to you.

Charge only what you can pay in full each month. If you have a credit card, you could use to work on your credit. Just make sure you pay off the card in full each month. “It is imperative to create and use a simple budget to make sure you follow this rule,” said Freddie Huynh, the San Francisco-based vice president of credit risk analytics at Freedom Financial Network. “Being able to pay your bills on time is the most important factor in the calculation of your credit score, accounting for 35 percent.”

Review your credit reports regularly for accuracy and correct any errors you find. You can access credit reports from each of the three main credit reporting agencies once a year for free at “If any report shows any inaccuracy, follow the directions on each agency’s website to correct it,” Huynh said.

The bottom line

Carefully consider your options before taking out a personal loan. You should have a clear idea of how you’ll use the loan funds and what the total cost of the loan will be. Most importantly, if your credit has been damaged by poor financial habits in the past, you need to consider whether or not a personal loan is only a temporary solution to a larger problem.

“My biggest concern with anyone considering a personal loan to pay off high interest credit cards is that they are focusing on the symptom, not the cause,” said Todd Christensen, the Boise, Idaho-based education manager at Money Fit by DRS. “If the borrower is disciplined, it might make sense; otherwise, debt management through a nonprofit credit counseling agency could make more sense.”

While a personal loan can be one part of the credit building or repairing process, it’s not your only possible solution. In fact, Christensen said taking out a personal loan could be part of a multi-pronged strategy to boosting your credit. Still, a personal loan on its own could help depending on your finances — given that you properly research lenders, stay disciplined during repayment and take extra care of your money throughout the process.

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Barbara Balfour
Barbara Balfour |

Barbara Balfour is a writer at MagnifyMoney. You can email Barbara here


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