Thinking about taking out a personal loan? You’re definitely not the only one. According to LendingTree, Americans owe $257 billion in personal loan debt as of the second quarter of 2025.
From consolidating high-interest credit card debt to covering an emergency expense or even funding a big life event, personal loans can seem like a convenient solution. But just because the option is available doesn’t always mean it’s the right fit.
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Like most financial decisions, it comes down to weighing the pros, the cons and how it lines up with your unique situation. Before you jump in, it’s worth taking a step back to understand when a personal loan makes sense — and when you might want to explore other options instead. Here are some ways to determine whether taking this step is right for you.
Look at Purpose Before Price
“The very first thing I look at is not the interest rate — it’s the reason behind the loan,” said Angelo Crocco, CPA, CGMA, owner of AC Accounting.
He explained that a personal loan can make more sense when the money directly reduces higher-cost debt or funds something with a long lasting benefit. For example, paying off 22% credit card debt with a 9% personal loan can save thousands over time. Similarly, financing a home repair that preserves property value can be a strategic investment.
But borrowing money for a vacation or short-lived purchase rarely helps once repayment begins.
Learn More: 3 Reasons To Take Out a Personal Loan That You Might Not Have Considered in 2025
Calculate the True Cost
“A lot of my clients, when they first come to me, tell me that they focus on the monthly payment instead of the total cost over the life of the loan,” Crocco said.
He noted that while a $15,000 loan at 10% over five years can feel affordable at $318 per month, you’re still paying over $4,000 in interest. This trade-off should be compared against the benefit you gain and see whether it weighs more.
Also consider any origination fees and prepayment penalties, and see their impact on your credit score.
Plan the Exit Before You Enter
“A personal loan is not just money now,” Crocco said. “It’s a commitment that fixes your future income.”
In other words, you should know exactly how you’ll repay it and in what time frame.
The best strategy Crocco tells his clients is that when they borrow, they should align the loan with a solid plan, like debt consolidation, which is tied to strict spending changes or an easy investment that improves their financial stability.
“Without such a disciplined plan, the loan becomes another burden, instead of a solution,” he said.
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This article originally appeared on GOBankingRates.com: How To Determine Whether Taking Out a Personal Loan Is Right for You
