Should You Get a Personal Loan? 7 Rules to Follow Before You Borrow

A personal loan can make sense when you need a specific amount of money for a clear purpose, can comfortably afford the payments, and the loan improves your financial situation rather than simply moving debt around. Before borrowing, compare multiple lenders, look at APR and total repayment costs, choose a manageable term, understand all fees and penalties, and have a plan to keep from creating new debt.

Personal loans are becoming an increasingly important part of Americans’ financial lives.

In the second quarter of 2026, outstanding unsecured personal loan balances reached a record $281.2 billion, according to TransUnion, up 9.6% from a year earlier.

But the fact that millions of consumers use personal loans doesn’t mean taking one out is always a good idea.

I recently joined Experian’s #CreditChat on X for a discussion called “Personal Loans 101: What to Know Before You Borrow.” Along with other consumer finance experts, we discussed when personal loans can help, when they can hurt, and what borrowers should examine before signing an agreement.

My biggest takeaway can be summed up in one sentence:

“A personal loan is a tool, not a rescue. It only works if you fix the reason you needed it.”

Here are seven rules to help you decide whether a personal loan makes sense for you.

1. Borrow for a Specific Reason, Not Just Because Money Is Available

A personal loan is generally an installment loan. You borrow a specific amount and agree to repay it according to a predetermined schedule.

Unlike a credit card, which allows you to borrow repeatedly against an available credit line, a traditional personal loan has an endpoint.

During #CreditChat, I described that distinction this way:

“It makes the most sense when you need a specific amount for a specific reason and you want a debt with a finish line, not a balance that just lingers.”

That distinction matters.

A personal loan might make sense for something like consolidating higher-interest debt or handling a necessary one-time expense such as a major car repair, home repair or medical bill.

It becomes more questionable when you’re borrowing simply because you’re short on money every month.

Before applying, ask:

What specific problem will this loan solve?

If you can’t answer that clearly, borrowing may simply postpone the underlying financial problem.

2. Don’t Judge a Loan by the Monthly Payment

A lender can sometimes make a loan look more affordable by stretching repayment over a longer period.

The monthly payment falls.

But that doesn’t necessarily mean the loan became cheaper.

You may wind up paying substantially more interest over the life of the loan.

That’s why I tell consumers:

“A low monthly payment can hide an expensive loan.”

Look beyond the payment and examine:

• The annual percentage rate, or APR
• The loan term
• Origination and other fees
• The amount you’ll actually receive
• The total amount you’ll repay

APR is especially useful when comparing offers because it incorporates certain costs of borrowing rather than showing you only the stated interest rate.

The Consumer Financial Protection Bureau also warns that personal installment loans can include fees such as origination fees, documentation fees and late fees. Review the lender’s disclosures so you understand the actual cost before agreeing to the loan.

3. Shop Around Before You Borrow

Don’t assume the first lender that approves you is offering your best deal.

Personal loan pricing can vary considerably based on the lender and your credit profile.

During #CreditChat, I recommended shopping at least three lenders before making a decision.

Compare the same basic information across each offer:

• APR
• Monthly payment
• Repayment term
• Origination and other fees
• Total repayment amount
• Prepayment provisions

When possible, look for lenders that allow you to check potential terms through prequalification without a hard credit inquiry. Confirm how a lender handles credit checks before submitting an application.

The objective isn’t merely to get approved.

It’s to get the most favorable loan you reasonably qualify for.

4. Choose a Payment You Can Handle During a Bad Month

This may be the most overlooked part of borrowing.

People frequently calculate affordability based on how their finances look today.

But loans aren’t repaid only during good months.

Cars break down. Utility bills spike. Children need things. Income can fluctuate. Unexpected expenses happen.

So during #CreditChat, I offered this rule:

“Pick the shortest term whose payment you can comfortably make on a BAD month, not a perfect one.”

A shorter repayment term generally means higher monthly payments but potentially less interest paid over the life of the loan.

A longer term can lower the monthly payment, but it may keep you in debt longer and increase your total borrowing cost.

The right term isn’t necessarily the shortest one available.

It’s the shortest one you can realistically sustain.

5. Compare a Personal Loan With Your Other Options

If you’re considering a personal loan to consolidate credit card debt, another option may be a balance-transfer credit card offering a temporary 0% introductory APR.

Which is better?

I suggested a simple starting question during the chat:

“Can I realistically wipe this out during the 0% window?”

If you can pay the transferred balance off before the promotional period expires, a balance-transfer offer may be worth considering, after accounting for any balance-transfer fee and the card’s terms.

But if you know repayment will take several years, a fixed-rate personal loan with a defined payoff schedule may offer greater predictability.

Don’t make the decision based solely on the words “0% interest.”

Compare:

• Balance-transfer fees
• Length of the promotional period
• APR after the promotional period
• Personal-loan APR and fees
• Expected payoff time
• Total expected borrowing cost

The best product is the one that fits your actual repayment behavior—not the repayment plan you hope you’ll follow.

6. Read the Loan Agreement Before You Sign

Loan documents aren’t exactly beach reading.

Read them anyway.

The CFPB advises consumers considering personal installment loans to review loan disclosures carefully and understand the fees they may be responsible for.

At a minimum, I would look closely at:

Late-payment provisions. What happens if your payment is late? Is there a grace period? What fee could apply?

Origination and other fees. Is money being deducted from your loan proceeds? If so, make sure you’ll actually receive enough money for the purpose of the loan.

Prepayment provisions. Can you repay the loan early without an additional charge?

Federal lending rules recognize that some credit agreements can contain prepayment penalties and require applicable disclosures.

That’s why I told #CreditChat participants:

“If there’s a penalty for paying it off early, that’s not a deal … that’s a trap.”

The larger lesson is simple:

Know the rules of the loan before you accept the money.

7. Don’t Pay Off Your Credit Cards and Then Charge Them Back Up

This is where a potentially smart debt-consolidation strategy can become a financial disaster.

Imagine you owe $15,000 across several credit cards.

You take out a $15,000 personal loan and use the proceeds to pay off the cards.

Now your cards show zero balances.

That can feel like success.

But you haven’t eliminated the $15,000 debt. You’ve moved it.

If you start charging purchases to those cards again while still repaying the personal loan, you can eventually wind up with the personal loan plus another round of credit card debt.

As I put it during #CreditChat:

“Now you’ve got two debts instead of one.”

If you’re using a personal loan for debt consolidation, decide in advance what will happen to the newly available credit-card limits.

You may not necessarily want to close longstanding credit accounts, since doing so can have credit implications. But you should have a strategy for preventing those balances from creeping back up.

That may mean removing cards from your wallet, deleting stored card numbers from shopping sites, establishing spending rules or addressing the budget problem that caused the balances to accumulate.

Debt consolidation works best when it is accompanied by behavior change.

What About Secured Personal Loans?

Most discussions about personal loans focus on unsecured loans, but some loans can be secured by collateral.

That distinction is important.

With a secured loan, you’re putting an asset at risk if you fail to meet the repayment terms.

I know something about that risk personally.

During #CreditChat, I shared that my first new car—a 1987 Hyundai Excel—was repossessed when I was in college.

I was young and made a financial mistake.

I also learned from it. I never missed another car payment.

That’s one reason I want consumers to understand what the word “secured” really means.

A lower interest rate can look attractive.

But ask yourself:

What am I putting at risk in exchange for that lower rate?

Knowledge Snapshot: When Does a Personal Loan Make Sense?

A personal loan may make sense when:

• You need a defined amount for a specific purpose.
• The loan costs less than the debt you’re replacing.
• You can comfortably afford the payment.
• You’ve compared offers from multiple lenders.
• You understand the APR, fees, term and total repayment cost.
• You have a plan for paying the debt off.
• You’re addressing the underlying reason you needed to borrow.

A personal loan may be a poor choice when:

• You’re borrowing to cover a persistent monthly cash-flow shortage.
• You’re focused only on getting the lowest monthly payment.
• You haven’t compared other borrowing options.
• The fees substantially increase your borrowing costs.
• You would put an important asset at risk with a secured loan.
• You’re consolidating credit cards without changing the behavior that created the balances.

The Money Coach’s Bottom Line

There is nothing inherently good or bad about a personal loan.

What matters is what the loan allows you to accomplish and what happens after you receive the money.

Used strategically, a personal loan can replace more expensive debt, provide a predictable repayment schedule or help you handle a necessary expense.

Used without a plan, it can become one more payment competing for space in your monthly budget.

So before signing anything, ask yourself:

What problem does this loan solve?

What will it cost me in total?

Can I make this payment during a bad month?

Is there a cheaper or better alternative?

And what will I change so I don’t need another loan to solve the same problem later?

That’s the difference between using debt strategically and simply moving a financial problem into the future.

A personal loan is a tool, not a rescue.

Use the tool deliberately.

Frequently Asked Questions

Is a personal loan a good idea for paying off credit card debt?

It can be if the personal loan offers a lower overall borrowing cost and you can comfortably afford the payments. But consolidation only works if you avoid rebuilding balances on the credit cards you just paid off.

Is a personal loan better than a 0% balance-transfer card?

It depends largely on how quickly you can repay the debt and the costs of each option. If you can realistically eliminate the transferred balance during the 0% promotional period, a balance transfer may be attractive after considering its fee. If repayment will take considerably longer, compare the total cost and predictability of a personal loan.

Should I choose a shorter or longer personal-loan term?

Generally, choose the shortest term with a payment you can comfortably sustain, including during financially difficult months. Shorter terms typically require larger monthly payments but can reduce total interest costs.

What should I compare when shopping for a personal loan?

Compare APR, loan term, monthly payment, origination and other fees, total repayment cost, the amount of money you’ll actually receive and any provisions related to early repayment.

Can personal loans have prepayment penalties?

Loan terms vary. Check the loan agreement and required disclosures before borrowing to determine whether an early-payoff charge could apply.

What is the biggest mistake people make after consolidating credit card debt?

One of the most damaging mistakes is paying off credit cards with a consolidation loan and then accumulating new balances on those cards. You can wind up owing both the personal loan and new credit card debt.

Sources

• TransUnion, Q2 2026 Consumer Lending Industry Insights Report
• Consumer Financial Protection Bureau, Do personal installment loans have fees?
• Consumer Financial Protection Bureau, Regulation Z disclosures and official interpretations
• Experian #CreditChat, “Personal Loans 101: What to Know Before You Borrow,” August 19, 2026