The Ins And Outs of the Most Popular Type of Debt in the U.S.

Personal loans have been around for quite some time, however, they are now becoming more popular than ever. This is mostly due to the fact that using them to borrow money from the bank is often considerably cheaper than other financing options.

To put things into perspective, the total personal loan balances have hit $156 billion by the end of 2019, showing that more and more people are borrowing money from banks, rather than using credit cards or credit lines. Furthermore, the average balances for personal loans usually range between $16,000 and $20,000.

This having been said, the accessibility of these loans makes them both useful and attractive, but are they good for your particular needs?

An in-depth look at how personal loans work

The simplest way to define a personal loan is an amount of money that an individual borrows from a bank that must be paid back over time. In other words, the terms and conditions that you have to agree to get the loan will contain a set of monthly payments that you must make, up to the point where you have returned the money, plus interest.

To qualify for a personal loan, you must have a good credit score. This means that you will have to have a good relationship with the bank and also have used banking services for enough time to build a decent financial history. The higher your credit score is, the greater your chance of getting approved will be. Your credit score will also affect the monthly interest rate that you will be offered.

So, what are personal loans good for? The answer is simple: for anything that you need. Banks never place any restrictions on what you can do with the money, making the loans great if you need to purchase expensive products, to invest in a company, to pay the rent, or even to go on a vacation. Unlike other types of debt such as auto loans that can only be used to finance vehicles, personal loans do not have any strings attached, other than the fact that they must be paid on a monthly basis.

A large number of individuals are also using personal loans to consolidate their existing debt. Generally speaking, this means using the money from the personal loan to repay different ones and to top off your credit cards. This is useful mainly because this type of debt has much lower rates than others.

Why personal loans are great alternatives to using credit cards and credit lines

As far as using personal loans in favor of credit cards or credit lines is concerned, the single, most important thing worth remembering is the fact that the money does not count towards your credit utilization rate. This means that borrowing money through a personal loan will not have a negative impact on your credit score unless you are late with your monthly payments.

Furthermore, owing balances on your credit cards may prevent you from doing balance transfers. Personal loans do not come with any restrictions of this sort.

What are the disadvantages of personal loans?

For all the flexibility that personal loans offer, they also come with considerable disadvantages that you have to keep in mind before borrowing large amounts of money. The biggest one is that you may get stuck with a very high interest rate, especially if your credit score isn’t too great.

As a side note, if your credit score is too low to get a decent monthly interest rate, you will be able to get someone that has a better financial track record to cosign the agreement. This means that another individual will put up his credit score and vouch for you, agreeing to make the monthly payments if you are unable to. In return, your chances of having your loan approved will be greater and you may also get a better monthly rate.

It is also important to keep in mind that some lenders may penalize you if you want to pay off a personal loan early, keeping you stuck until the end of the agreement.


Personal loans are great if you want to avoid using your credit cards and they are considerably cheaper than other types of financing. Furthermore, they do not come with any restrictions in terms of what you can do with the money.

Overall, they are great ways to get money if you need to purchase expensive products, to pay your rent, to invest, or if you need funds to go on a vacation. This having been said, although the loans do not count toward your credit utilization, they can still lower your credit score if you do not make the monthly payments on time.