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Pros & Cons Of Getting A Personal Loan

Taking out a personal loan can be an excellent way to afford purchases that you otherwise wouldn’t be able to. From building credit to consolidating debt, personal loans are an invaluable tool for your financial health. However, they can also lead to more debt and can negatively affect your credit score if you aren’t careful. Keep reading to learn more about the pros and cons of taking out a personal loan.

Whether you’re ready to get started with a personal loan or you’d just like to ask a few questions, the Credit Union of Southern California (CU SoCal) can help you out. Give us a call today at 866.287.6225 for more information on our flexible personal loans and other great banking products.

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What Is A Personal Loan?

So, what are personal loans? Basically, a personal loan is money borrowed by an individual from a lending institution, like a credit union or bank. The lender grants the loan to the borrower based on their creditworthiness, which indicates how likely they are to pay the loan back. Credit score, current debt, and income all contribute to creditworthiness. Higher credit scores will also help borrowers get the best terms and lowest interest rates.

Secured Vs. Unsecured Personal Loans

Personal loans come in two types: secured and unsecured. An unsecured personal loan is the standard type that most lenders offer. With an unsecured loan, the borrower does not have to offer up anything as collateral if they can’t pay. There’s less of a risk for the borrower, though their credit score will drop if they can’t meet their monthly installments.

Secured loans, on the other hand, are guaranteed with collateral. This could be a savings account or a high-dollar item such as a car or house. This offers the lender some extra security, especially if your creditworthiness isn’t as high as it could ideally be.

What Can Personal Loans Be Used For?

You can use a personal loan for just about anything. The most common personal loan uses include building credit, consolidating debt, making a large purchase, paying for emergencies, or funding a vacation or wedding.

Advantages Of Personal Loans

Whatever you need it for, there are several advantages to taking out a personal loan instead of other types of loans. Here’s how a personal loan can help you reach your financial goals.                             


Personal loans tend to be the most flexible type of loan you can take out. Whether you need a low monthly payment or a low interest rate, lenders can usually find the terms that work best for you.

Lower Interest Rates

It can be tempting to make large purchases with a credit card, but they generally carry pretty high interest rates. Personal loans usually have lower interest rates, and you still get to use the money however you want.

Higher Borrowing Limits

Along with lower interest rates, personal loans also generally come with higher borrowing limits. This means that you can apply for a higher loan amount than what your credit card may be.

Debt Consolidation

Another great aspect of personal loans is that borrowers can use them to consolidate debt. For example, if you have several credit cards that you owe money on, it can be hard to keep track of payments each month since each card may have a different monthly minimum and payment date. Taking out a personal loan allows you to pay off all credit cards in their entirety and then pay only a single monthly payment to cover the new loan.

Quick Funding

Depending on your lender, you could receive funds from your personal loan the same day you apply. As long as you have all of your financial ducks in a row when you apply, you shouldn’t have to wait long to receive the money. For tips on how to speed up the process, check out our post on how long it takes to get a personal loan.

Improve Monthly Cash Flow

When you use a personal loan to consolidate debt, you’re also able to improve your cash flow by switching from a high interest rate to a much lower one with a personal loan. This frees up more cash each month for you to use for bills or other recurring costs.

Improve Your Credit Score

You can also use a personal loan to improve your credit score. When you take out a loan and meet your monthly payments on time, your credit score will improve. However, some loans, like the CU SoCal Credit Builder Loan, are specifically designed to improve your credit score quickly and simply, without much risk to the borrower.

Disadvantages Of Personal Loans

While personal loans are outstanding for many situations, they do come with a few drawbacks. Most of these depend on your reliability as a borrower, so making sure you pay on time every month is key to avoiding most of the following disadvantages. Here’s what you should be aware of:

Interest Rates Can Sometimes Be Unfavorable

If you have poor credit, you might find that a personal loan comes with higher interest rates than other options, like credit cards. If you’re only offered personal loans with high interest rates due to your credit score, you might consider a secured personal loan or HELOC (home equity line of credit). Be careful, though; defaulting on the loan could lead to foreclosure or loss of collateral.

Fees & Penalties

When you calculate whether a personal loan is a good option for your needs, don’t forget to consider any fees and penalties associated with it. For instance, origination fees cover loan processing and could be anywhere from 1% to 6% of the loan amount. Paying off the loan before the end of the term can lead to prepayment penalties as well. By the way, CU SoCal does not charge fees for its personal loans.

Higher Monthly Payments

Another drawback to using a personal loan over a credit card is that the loan likely has higher monthly payments than a standard credit card minimum monthly payment. Missing or late payments could lower your credit score, so it’s vital to budget for higher payments before applying.

More Debt

Choosing a personal loan to consolidate debt for several credit card balances is a great way to streamline payments. Still, it will only work to reduce debt if you stop overusing those credit cards. If you continue to use the cards as before, you’ll find yourself with even more debt.                             

How To Know If A Personal Loan Is Right For You

Understanding all of the pros and cons of getting a personal loan is an excellent first step to knowing if a personal loan is right for you. As you consider getting a personal loan for immediate cash flow, funding a vacation, making a large purchase, or consolidating debt, you need to know if and how it might negatively affect your financial situation.  As long as you have the capacity to make your monthly payments on time and in full, a personal loan could be the right tool for your needs.

Where To Get A Personal Loan

If you’ve decided that getting a personal loan is the right choice for your needs, it’s time to think about where to get one. Luckily, you have several options for taking out a personal loan. Each lender offers unique terms and rates, so it’s essential to shop around before you make a decision. Plus, each lender will have its own sets of pros and cons to personal loans. Here’s what you need to know about the three main types of lenders for personal loans.


Traditional banks are a great place to start looking for a loan, especially if you already have a checking or savings account with one. Many banks offer reasonable rates and terms to current clients with good credit. However, banks have higher credit score and income requirements than other institutions, so it could be challenging to get approval if your credit score is low. Banks sometimes take longer to release funds, so it might be better to check out other options if you need money immediately.

Credit Union

Credit unions are a great option for personal loans thanks to their not-for-profit status. They reinvest any profits into their Members in the form of lower interest rates and better terms overall. Plus, credit unions like CU SoCal don’t charge any fees for Members, which will help you cut costs when seeking a personal loan. Becoming a Member is easier than you think, too, so don’t let that stand in your way of getting the most competitive rates on personal loans.

Online Lender

Numerous online lenders offer same-day approval and funds, so this might be a good choice if you need money immediately. However, these lenders often have much higher interest rates and generally lack the personalized service you’d find at credit unions and some local banks.

CU SoCal Personal Loans

CU SoCal offers customized personal loans to fit all our Members’ needs, offering quick preapprovals, zero application fees, and competitive interest rates.

Apply For A CU SoCal Personal Loan Today!

If you’re ready to get started with a flexible personal loan that’s perfect for your needs, get in touch with CU SoCal today at 866-287-6225 and schedule a free, no-obligation consultation with our friendly financial experts. Have all the information you need about the pros and cons of personal loans? Apply online for a personal loan today!

Get Started on Your Personal Loan!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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