Personal Loans: Expectation vs. Reality

Personal loans can be lifesavers when you are really pinched for immediate cash. Whether it is making a down payment for a home or an important event, such as a wedding, a personal loan can be the ultimate answer. 

It does not carry the burden of high-interest rates such as a credit card. Apart from this, there are a lot of advantages of personal loans. But is it all roses and peaches when it comes to personal loans? Do they really meet your expectations, or do they fall short?

What is a Personal Loan?

A personal loan is one type of loan that is given to individuals for their own needs. The loan can be taken from financial institutions, such as a bank. It can also be secured from somewhere else other than a bank, such as a non-banking financial company, also known as a NBFC. 

Personal loans typically fall under the category of unsecured loans. It is because the borrower is not required to put up collateral, such as property or assets like gold. 

Instead, the conditions that determine personal loans include a good credit score, level of income, repayment capacity, and employment history, among others. However, the eligibility criteria tend to vary from one financial institution to the next. 

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Types of Personal Loans

Apart from the most common type of personal loan, i.e., unsecured loans, there are other types of loans that fall under personal loans. They are:

Unsecured Personal Loans

The most common type of personal loans, it is also the most preferred. Here you don’t need to put up anything as collateral, such as property or jewelry. 

However, unsecured personal loans do not give any buffer to the lenders. This is the reason why they have an interest rate that is higher than other types of loans. The interest rate for unsecured personal loans can be anywhere from 5% to 36% at both extremes. 

The term of repayment is typically one to five years. Some institutions offer up to seven years, which is the maximum you can expect from unsecured personal loans. However, both the interest rate as well as the term depend on the financial institution. 

The most common eligibility criterion for this type of loans is the credit score of the borrower. 

Secured Personal Loans

In this type of personal loan, you will be required to put up collateral of some sort. It can be anything from a home, to a car, or other valuable assets. Some financial institutions also allow borrowers to take secured personal loans against assets, including savings account. 

Secured personal loans have a far lesser rate of interest, as the lenders consider this less risky. The rates of interest can be anywhere from 3.84% to 35%. The term of repayment can be anywhere from six months to twelve years.

Apart from the collateral, secured loans are subject to good credit scores, minimum age requirement, and American citizenship, among others. 

Co-Sign Loans

In this type of loan, a co-signer acts as your insurer. They take the responsibility to repay the loan in case you fail to do so. Co-sign loans are usually best for those who have minimal to no credit histories. 

In order to maximize your chances of loan approval, the co-signer should have an excellent credit score. 

Variable-Rate Loans

This type of personal loan can be considered if the repayment term is very short. It is because variable rate loans are dependent on a specific rate set by financial institutions. This means that the interest rate and the repayment terms of your loan will rise and fall with the rate set by banks.

However, some variable rate loans have a cap that controls the frequency of the rates changing over a period of the loan.

Fixed-Rate Loans

Fixed-rate loans have the advantage of having consistent payments every month. This is an excellent option if you have concerns about the increasing rate of interest. 

Debt Consolidation Loans

If you have a lot of debts, such as multiple credit card debts, you can combine the amount and roll it into a single loan called a debt consolidation loan. It is an excellent way to combine a number of debts into one monthly payment. 

If you decide to opt for this loan, look for one that has a lower annual percentage rate than that of the existing ones. 

Personal Line of Credit

In this type of loan, you can have access to a pool of cash called a credit line. The money is retrieved as and when needed instead of cashing in a lump sum. The rate of interest only applies to the amount of cash that is taken at a time. 

It is more like a credit card than a personal loan. However, it can be a helpful source when you have an ongoing emergency. 

Pawn Shop Loan

It is one type of secured personal loan. Here, you can borrow money against a valuable item, such as jewelry, electronics, or other personal valuables. 

The rate of interest in this type of loan is extremely high. However, the advantage is that you will not be chased around by debt collectors in case you fail to pay. The pawn shop owner will sell off your valuable. 

Payday Loans

This is one type of unsecured loan, where you take the money and it is repaid on the next payday. Payday loans have the highest interest rates. Consider this option only if there is no other option. 

Credit Card Cash Advance

Another way to secure personal loans is by using your credit card. Short term personal loans can be acquired from a bank or even an ATM. 

These types of personal loans also have very high-interest rates. 

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What You Expect from Personal Loans vs. the Reality

Personal loans are not as conventional as those who apply for credit cards. According to the Chamber of Commerce, around 176 million Americans have credit cards, while just 19.1 million have some type of unsecured personal loans. 

However, a recent report shows that the number of consumers who have applied for personal loans has increased by more than 19.2% as of 2019. This is a significant increase and is attributed to its accessibility. 

But what else is there behind this wind of change in personal loan?

Expectation: To secure a personal loan, you have to go to a bank and spend countless hours filling out the paperwork.

Reality: Personal loans can be applied at a bank, but it can also be done online using a smartphone or a laptop. Filling up the paperwork does not take a lot of time as well. 

This process has been facilitated primarily due to the introduction of Fintechs. It has contributed to more than 38% of accounted loans. As more and more people resort to using the internet on mobile-enabled platforms, financial service companies are taking advantage to cater to the needs of the consumers. 

Expectation: Personal loans take a long time to get approved.

Reality: Personal loans are among the quickest to get approved, provided you meet all the eligibility criteria. It is not uncommon for a personal loan to get approved on the same day it was applied. The longest is typically up to a few weeks. 

Of course, it depends on the institution that you are applying. The fastest personal loan approvals come from online lenders. Credit unions, including banks, take longer to approve personal loans. 

After the loan is approved, the amount will be reflected in your account within a few days. This is in stark contrast to other loans, such as a credit loan or a home loan. 

Alternatively, even if the loan did not get approved, lenders will waste no time informing you. This is a great help, as you can extend the areas of searching for personal loans instead of waiting on the one that you have applied. 

Expectation: The rate of interest of personal loans is not very high.

Reality: Personal loans typically do not have a high rate of interest. But a certain type of personal loans, most notably the unsecured personal loans, are considered high-risk by most lenders. Therefore, they carry a higher rate of interest to offset the risk. 

It can be especially tricky if you don’t have a good credit score. When you shop around for personal loans, do not settle for one that has a low-interest rate. Although the company may advertise it as a low-interest rate, consider how the rate will work when applied to your personal information and credit scores. 

Another factor that you need to consider apart from the interest rate is the Annual Percentage Rate. The APR affects the origination fee to a large degree. Almost all financial institutions and lenders will require an origination fee. So you cannot avoid this.

Even when the rate of interest is reasonable, if the APR figure is on the higher side, you need to take a second look. A personal loan typically comes with 1% – 6% of origination fees at both extremes. 

Expectation: You can get a personal loan from any financial institution. 

Reality: This is true to a certain degree because personal loans are a booming business for financial institutions. And scammers are abundant in this business. 

The easiest way to spot a scam lender is when they ask for advance payment of any kind without the papers. Some scammers also provide a prepaid credit card.

To protect yourself, apply for a personal loan only from certified financial institutions. To know whether a lender is accredited or not, visit the Better Business Bureau website and check to verify the credentials. 

Alternatively, you can also check the lender’s website for information. In case they don’t have a website, you can ask the state attorney general’s office and verify the lender’s credentials.

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Expectation: A personal loan is the solution to all your debt problems.

Reality: While personal loans are known for their versatility, to expect that it will end all your debt problems is unrealistic. Unlike other types of loans that are earmarked, such as car loans and home loans, you can use personal loans for several purposes. 

It can also be used for consolidating a number of debts, but be under no illusion that it is the end of your debt. You will still have to make monthly payments regularly. 

If you use the personal loan to wipe off existing debts and rack up interests on the personal loan, it can be a vicious cycle. The idea is to use the personal loan as a stepping stone for getting out of debt and not to go deeper into the abyss.

Expectation: You can pay off the loan whenever you can. 

Reality: If you have the experience of repaying credit card debts and expect the same from personal loans, you will be in for a surprise. 

The monthly payments on all personal loans are fixed, and it cannot be compromised. You will have to make regular payments on a monthly basis. You cannot choose to make the payment in parts as well. This can become very expensive if the loan is a significant amount and the term is more than two years. 

If you fail to make the monthly payments, the lender of a secured loan can seize your property. If it is an unsecured loan, you will be sued by the lender. 

Another irony that is attached to paying off personal loans is the prepayment penalty. If you have in mind a plan to repay back the entire loan before the term is up, you are liable to pay this fee. 

The repayment term for personal loans is also fixed, much like the monthly payments, and it cannot be changed. 

Additionally, the more significant the amount of the loan, it can carry additional fees that may not be apparent without a closer look. Therefore, it really pays to probe and look for hidden fees before you settle for a lender. 

Expectation: You can only get personal loans with good credits. 

Reality: A vast majority of lenders require good credits to approve personal loans. In fact, the chances of securing loans with low interests are also higher if you have good credit scores. 

However, you can also secure personal loans if your credit scores are less than stellar. Many lenders and financial institutions will give you loans if you have poor credits. You can apply for secured as well as unsecured loans.

But there is a catch – the interest rates on personal loans with poor credits are quite high.

Expectation: Only young and working people take personal loans

Reality: This cannot be farther than the truth. Young working millennials and younger frequently apply for personal loans. 

But according to a recent report by TransUnion, Gen X has the most applications for personal loans. For the uninitiated, Gen X are those who were born between 1965 to 1979. This was followed by Baby Boomers and then the millennials. 

It is not just related to personal loans; Gen X has the highest level of debt in American history. Experts believe that it is because many of the people belonging to this generation underwent the financial crisis of 2008. It is quite possible that they endured a couple of years without work and steady income and instead racked up debts.  

They also have multiple responsibilities, including raising the children, looking after aging parents, and paying off the mortgage all the same time. 

Advantages and Disadvantages of Personal Loans

In this section, we will talk about the advantages and disadvantages of personal loans. If you have been planning to secure a personal loan, understanding these factors will enable you to make the right decision.



One of the best features of personal loans is its versatility. Because it is not designated as a home or auto loan, you can use personal loans for almost any purpose. 

You can use the loan for medical bills, restoring a home, consolidating credit card bills, paying for a vacation, or buying personal items, such as jewelry.


Another reason why personal loans are gaining momentum are their availability. Apart from traditional banks and credit unions, a good number of Fintechs and online platforms also lend personal loans.

Unlike the days of old, you don’t have to go to a bank to apply for it. An added advantage of these online financial institutions is that you can apply for loans by filling up the forms online. 

Debt Consolidation

Debt consolidation, especially credit debt consolidation, is a big reason why many people apply for personal loans. If you have a number of credit cards that have accumulated a good amount of debt, securing a personal loan can be a great way to consolidate all the debts into one streamlined payment. 

Fixed Payments

Personal loans are characterized by fixed monthly payments, as well as the term of payment. It is a great way to keep you motivated and work towards cleaning your debt. 

You cannot change the rules of the term or the payment, so you have no choice but to stick to it. A significant advantage of a fixed term is that you get a comfortable time to repay the loan. 

Timely Approval

Personal loans are known or their quick approvals. Some lenders approve personal loans in just 24 hours, which can be a huge help for someone who is facing an emergency. 


Higher Rate of Interest

Although personal loans do not have exorbitant rates of interest, they do carry a certain amount that can accumulate over time. The rate of interest is also affected by how good or poor your credit score is and whether or not it is a secured or unsecured type of loan.

Penalties and Fees

Personal loans have a great affinity for additional fees and penalties. The higher the amount of loan, the higher the fees. 

This can include anything from prepayment penalty, origination fees, and high APR, among others. 

Fixed Terms and Payment

If you have been paying small amounts for your credit debts, this can be a huge shocker. Personal loans have fixed payment amounts and duration. You have to make the payment every month without any excuse. 

If you fail to make the payments on time, the lenders can sue you for unsecured loans or seize your collateral for secured loans. 

Tips to Secure an Excellent Personal Loan

Here are our top tips to secure the best deal on a personal loan.

  • Shop around for the best deal – There are multiple lenders all over the country. Each one offers different interest and terms. To get the best deal, it is best that you compare at least a dozen vendors before you make the decision. 
  • Borrow only from legit lenders – Just because you’re in urgent need of money does not mean you go and borrow from the first lender you come across. It can cost you heavily — double-check to ensure that the lender is certified. 
  • Short term loans are better – Unless you have no other choice and your circumstances do not permit, short term loans come with better deals than long term ones. Long terms loans can look attractive and cheaper, but in reality, they are more expensive and can cost more. Short term loans can look risky and more burdensome, but they offer you a better deal. 
  • Stick to the payment terms – It can be a challenge to make the payments every month. But once you get into the rhythm of paying and you see your debts clearing, it can be a great motivation.

As you might have concluded, personal loans can be the best solution when you are strapped for cash. They are relatively easy to secure, and you can use them for a number of purposes.

It is certainly not everything you expect, but it certainly does not disappoint. The best strategy is to consider your financial circumstances and look for the best deal before you secure a personal loan. 

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