There are moments in life that make you realize you’re well into your 20s — like the first time you blow a lot of money on fine cheese and a nice bottle of wine at the grocery store.
Getting a personal loan is on that list, as well. Although it sounds so adult to take out a personal loan, it’s a situation you might find yourself in before you’re 30.
Before taking out a personal loan in your 20s though, consider the following.
4 pros and cons of taking out a personal loan in your 20s
Not all 20-somethings are created equal — some have better credit histories than others. If that’s the case for you, check out our guide to personal loans for 30-somethings. You’re probably ahead of the game.
If not, take a look at these four pros and cons of taking out a personal loan in your 20s.
1. Pro: You could consolidate your credit card debt
As counterintuitive as it might seem, taking on new debt could help erase your credit card debt. It’s a popular strategy because the best personal loan companies offer lower interest rates than those found on credit cards.
Say you have $15,000 in credit card debt that you’re looking to pay off and your card issuers are charging a 15.00% interest rate. If you decided to pay it off by borrowing that amount from a lender in the form of a personal loan at a 10.00% APR with a shorter term and higher monthly payment, you’d save $11,138, according to our credit card consolidation calculator.
Most importantly, you’d pay off your creditors and push your credit card balance back to zero. Although you’d still have $15,000 in debt, you’d enjoy other benefits of personal loans. For example:
- Unlike revolving credit, personal loans are paid in installments and therefore have an end date.
- You’d make one monthly payment to one lender instead of to multiple credit card companies.
- You’d (ideally) pay less interest over the life of the loan.
2. Con: You might be tempted to misuse the loan
Personal loans can be used for almost any purpose, with few restrictions from lenders. Upgrade, for example, allows you to use a personal loan for most expenses, except to cover post-secondary education costs, investments, illegal activities, or gambling.
There are many ways you could use your loan amount, but not all of them are wise. Here are four types of expenses you probably should pay for in a different way.
- Everyday bills: You might think a personal loan is a perfect solution to cover the bare necessities while you get on your feet. Instead of taking out a loan though, consider utilizing community support programs to avoid putting yourself in the situation where you’ll rack up debt for your basic needs.
- Big purchase: Whether you’re eyeing a flat-screen TV or a four-wheel-drive car, paying for a big-ticket item with a personal loan is almost always a bad idea. That’s because you’re paying the sticker price for the item, plus the interest rate on your loan, making it a much more expensive purchase.
- Vacation: Maybe you see a personal loan as paving the way for the dream vacation you’ve always wanted. However, you have to consider the added cost of the trip after accounting for interest. Budgeting and setting a savings goal might not be as immediately gratifying as receiving a lump sum from a lender, but it’s the better way to go.
- Wedding: The average American is getting married in their late 20s, so you might not be too far from getting hitched. If that’s the case, consider cutting your guest list or receiving help from family members to cover costs for the big day.
3. Pro: It could help you invest in yourself
Although not all expenses should be paid for with a personal loan, there are plenty of reasonable uses for one.
For instance, at this stage in your career, perhaps you’re considering one of the following expensive life changes:
- Relocating: Maybe you aced an interview for an out-of-state job only to find out that you’ll have to pay for your moving. Borrowing money to cover some or all of the costs could be a smart idea if you take into account whether your new salary is enough to help you repay the loan.
- Continuing your education: You may have decided to take out student loans to pay for your undergraduate and post-graduate degrees. But you could use a personal loan to pay for a certification, class, or conference that you need to be promoted at work. Before resorting to borrowing, however, find out if you can get your employer to pay for the program or if you can work out a payment plan with the organization offering it.
- Starting a business: If you have excellent credit, you might find that a personal loan is the cheapest way to start funding your small business. Before signing on the dotted line, however, ensure you have a repayment plan that isn’t contingent on your business success.
4. Con: It could come with high interest rates
This is the real catch of it all: To benefit from personal loans — like other installment loans — you need to have good-to-great credit, plus a satisfactory debt-to-income ratio.
Without these marks of a strong personal loan application, you could be quoted interest rates as high as 35.00% — and that’s from reputable lenders.
There are plenty of predatory lenders offering personal loans at much higher rates with similarly short repayment terms. That makes the loans risky to borrow and difficult to repay.
If you’re considering borrowing before your 30th birthday, put yourself in the best possible position by improving your credit score and prequalifying for a personal loan. Then, and only then, can you enjoy the advantages of a personal loan.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|