Personal Loan Balances Just Reached $241 Billion. Should You Sign One?

U.S. consumers don't tend to shy away from borrowing money, whether in the form of auto loans, mortgages, or personal loans. And if you've been thinking about putting a personal loan in place, you're in good company.

U.S. personal loan balances reached $241 billion during the third quarter of 2023, according to TransUnion. That's an increase of 14.8% from a year prior.

You may be tempted to sign one of these loans yourself. But it's important to know about the pros as well as the cons.

The upside of personal loans

There are plenty of good reasons to sign a personal loan:

• Flexibility: You can take out a personal loan and use the proceeds for any purpose.
• Lower interest rates than credit cards: Right now, borrowing costs are up across a range of consumer loans and products. But generally speaking, personal loans are a relatively affordable way to borrow, especially compared to the interest rate on credit cards.
• Predictable monthly payments: Personal loans are installment loans, so you get a fixed interest rate on your debt and the same monthly payment throughout your repayment period.
• Quick closings: Personal loans tend to close quickly, so much so that you'll sometimes have your loan proceeds the same day you apply (in many cases, you will have to wait a day or two).

The downside of personal loans

You might encounter certain pitfalls with a personal loan:

• Flexibility: The fact that you can take out a personal loan for any purpose might lead you to borrow for the wrong reason.
• Credit score damage if you fail to make payments: Personal loans may be more affordable than other loan types, but the risk of falling behind still exists. If that happens, it could seriously wreck your credit.
• Fees: It costs money to put a personal loan in place. You can often roll your closing costs into your loan, but you'll need to pay them nonetheless.

Should you sign a personal loan?

You may want to move forward with a personal loan if it helps you achieve one of these purposes:

• Addressing an important home or car repair
• Making a home improvement that could significantly impact your quality of life
• Starting a business or side hustle you can make money from

You probably don't want to sign a personal loan to do things like:

• Purchase holiday gifts
• Buy new clothing you don't need for work
• Upgrade electronics when yours work perfectly well already
• Go on vacation

The latter category represents things you should really aim to save up for rather than finance. But for bigger-ticket items that you need to function, like replacing your roof, signing a personal loan makes a lot of sense.

All told, you may decide to join the ranks of the many Americans who have a personal loan in place. But think about the pros and cons before applying for a loan of your own. And spend a little time shopping around with lenders so you can ideally walk away with the most favorable borrowing terms.