MW These increasingly popular loans can save you thousands of dollars in interest - or double your debt. Here's when they work.

By Genna Contino

Some 26.4 million borrowers held $275 billion in personal-loan debt last year

Personal loans are often used to consolidate unwieldy credit-card debt - but whether a personal loan is right for you depends on your spending habits.

Lifestyle creep doesn't always look reckless on the surface - sometimes it's just a gym upgrade or a few extra dinners out. For one Los Angeles client of financial planner Joon Um, those choices snowballed into $38,000 in credit-card debt.

Stuck with mounting debt carrying 22% to 26% APR, Um helped the client refinance the debt into a three-year personal loan with a 9.5% APR. "The monthly payment was structured and fixed, which created discipline," said Um, a certified financial planner at Secure Tax & Accounting in California.

They cut discretionary spending by about $1,000 a month by pausing their Equinox membership, setting a spending limit for dining out and taking fewer vacations. These changes helped them save thousands of dollars in credit-card interest over several years - and they ultimately paid off the personal loan early.

"Personal loans can make sense for structured debt consolidation or a short-term need with a clear payoff plan," Um said. "They're risky for discretionary spending or unstable income situations."

Um's client is among a growing group. While personal loans represent just 1.4% of total consumer debt, according to LendingTree (TREE), they are quickly gaining traction. Originations for unsecured personal loans - meaning they don't require collateral - surged 21% in 2025, according to new data from TransUnion (TRU), and are expected to continue to grow in 2026. In the fourth quarter of last year, 26.4 million borrowers held a record $276 billion in personal-loan debt, up from $251 billion in 2024.

A personal loan can be a powerful tool for consolidating high-interest debt, but it's far from a cure-all. Financial experts warn that without a clear payoff strategy - and meaningful cuts to spending - borrowers risk swapping one expensive form of debt for another.

Here are three uses for personal loans recommended by experts - and three ways borrowers should avoid using them.

When personal loans work best

Refinancing credit-card debt

The largest share of personal-loan borrowers, 40%, use them to consolidate debt, according to a LendingTree survey, and 11% surveyed said they took out the loan to refinance credit-card debt.

Turning several credit-card bills into one bill with a fixed, lower interest rate can be a good solution, according to Matt Schulz, chief consumer finance analyst at LendingTree. However, it shouldn't necessarily be a consumer's first choice if they're overwhelmed by credit-card debt. The "ultimate" way to consolidate credit-card debt, Schulz said, is a balance-transfer credit card with a 0% introductory rate.

Balance-transfer credit cards move your balance to a new card that doesn't charge interest for a certain period of time, typically 12 to 15 months. However, not everyone qualifies for these cards - consumers typically need to have good to excellent credit. A "good" credit score ranges from 670 to 739, according to Experian, while "very good" credit starts at 740 and an "excellent" score is anything above 800.

"If you don't have quite good enough credit to qualify for a 0% balanced-transfer card, a low-interest personal loan is a pretty good consolation prize," Schulz said. This creates "a situation that is a little easier to budget for because you know how much you're going to owe each month."

But keep in mind that this solution doesn't work if the borrower is racking up additional credit-card debt while paying off the loan. For Um's client who took out the personal loan, this change in behavior is what really made a difference toward getting their finances back on track.

"The underlying issue should be addressed to avoid digging further away from the escape," said Landon Tan, a certified financial planner and founder of Nyack, N.Y.,-based Query Capital.

Major purchases like home renovations or a medical procedure

Other reasons for taking out personal loans listed in the LendingTree survey included paying for home improvements (6.9%), car repairs (3.6%) and medical expenses (3.4%). Ideally, these costs would be covered by an emergency fund. But the reality is that only 47% of Americans have enough emergency savings available to cover an unexpected $1,000 expense, according to Bankrate.

"You don't necessarily want to use these for daily expenses and discretionary purchases that aren't super pressing," Schulz said. "Whereas with a home improvement or even a big car repair, it's more of a big one-time hit that you can take out knowing how much you need, and then pay it off and be done with it."

Consolidating buy-now-pay-later loans

Borrowers who take out multiple buy-now-pay-later loans simultaneously can find themselves with multiple bills to pay each month - and some who have missed a payment or failed to pay the entire loan within the set terms might find themselves paying hefty deferred-interest fees.

"It can be a nice overarching tool that can allow you to kind of simplify your bill-paying," Schulz said. "Especially if you're new to credit and managing your finances, it can be easy to get a little overwhelmed."

Don't use personal loans to pay for these things

Routine household bills and groceries

About 10% of personal-loan borrowers used the money to pay for everyday bills, which experts warn against. Generally speaking, these loans are best used for consolidating debt or one-time purchases - not recurring payments.

Credit cards provide more flexibility for non-discretionary purchases, like weekly groceries.

Personal loans "don't bring the flexibility that you would have with a credit card, for example, where if money's tight and you need to pay a little bit less on your credit card in a given month because grocery prices have gone up," Schulz said.

Vacations

Financial experts also discourage using personal loans to fund vacations. The loans "become dangerous ... when they are used to preserve a lifestyle instead of solve a balance-sheet problem," said Justin Rice, a certified financial planner at Hamilton, N.J.-based Personal Wealth Strategies.

"If overspending or unstable income is the root issue, the loan just restructures the pain."

Anything - if you plan to keep up bad financial habits

While Um, the California financial planner, had a personal-loan success story with one client, it didn't work out so well for another.

This person had around $25,000 in credit-card debt with a 24% APR, and they took out a $30,000 personal loan at 11% interest to pay it off. They thought they were hitting the reset button, but they never changed their spending habits.

"In L.A., lifestyle creep is real," Um said. The client kept paying a luxury car lease and a membership for Soho House, a social club that costs nearly $4,000 a year. They didn't cut back on dining at high-end restaurants or attending music festivals. Within a year, they had racked up about $18,000 in new credit-card balances, on top of the personal loan.

"Instead of one problem, they had two," Um said. "A personal loan works when it's part of a reset. It hurts when it's just fuel for the same habits."

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-Genna Contino

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February 26, 2026 17:04 ET (22:04 GMT)

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