Personal Loan Risks: 3 Potential Downsides to Consider

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Thinking of getting a personal loan? You may want to go another route.

There may come a point in your life when you need to borrow money. Maybe you have a home repair you can't put off, or you need money to buy furniture for your new house. You may be considering getting a personal loan, especially if you don't have a home to borrow against (or enough equity in one to borrow against).

A personal loan can be a smart way to borrow. But be aware of these personal loan pitfalls.

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1. You may have to borrow more than you need

Some personal loans will let you borrow as little as $1,000. But many have a higher minimum -- anywhere in the ballpark of $2,500 to $5,000, depending on the lender. The logic is that if a lender is going to go through the process of checking your credit and putting together loan paperwork, the sum you're borrowing has to be high enough to make it worth that effort.

Now if you need to borrow a substantial amount of money, a personal loan minimum may not be a problem. But what if you only need a $750 loan? In that case, a personal loan may not work for you.

2. The fees can be high

When you take out a personal loan, you don't just pay interest on the sum you borrow. You can also end up on the hook for costly fees. Many personal loans come with origination fees, which lenders impose for going through the motions of putting a loan into place.

Origination fees for personal loans vary by lender. Some might charge a lower fee of 1%. Or, you could pay 5% (or even higher).

Now the good news is that lenders will generally let you roll those fees into your loan rather than require you to pay them up front. But that still means borrowing more and having to pay more than you'd like.

3. You could get stuck with a higher interest rate than you'd like

A key selling point for personal loans is that the interest rate you'll pay on the sum you borrow is generally much lower than the interest rate you'll pay on a credit card. But that doesn't mean all personal loans offer competitive interest rates. If your credit score isn't in the best shape, you could end up with a higher interest rate -- one that isn't much lower than what a credit card will charge.

Many people turn to personal loans when they need cash in a pinch, and the great thing about personal loans is that they tend to close quickly, which means you can often get your money within days of applying. Plus, personal loans let you borrow money for any reason. But before you get one, read the fine print and make sure you understand how personal loans work and what you're signing up for. And also shop around so you can be assured you're getting a reasonably good deal.

The Ascent's Best Personal Loans for 2021

The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.