Personal loans are popular loans for a variety of reasons, but one of the main ones is their flexibility. You can use the money you get from a personal loan for almost any purpose. They’re also widely available, making them easy for many people to get.
Personal loans can help you achieve a variety of financial and personal goals and meet a variety of emergencies or needs. They are a widely available choice, but you’ll need to decide whether they are the best choice for you.
What is a Personal Loan?
A personal loan is a common type of loan available from many banks, credit unions, and online lenders. They typically let you borrow amounts ranging from a few thousand dollars to $30,000, $40,000 or more, and repay them over three to seven years. In general, no security deposit or collateral is required.
Interest rates on these loans can range widely. In general, the better your credit score, the lower the interest rate of the loan.
What Can You Use a Personal Loan For?
People use personal loans for many different reasons.
1. Consolidate Debt
According to a Lending Tree survey, debt consolidation is the single most popular use of personal loans.
If you have multiple debts, it can be difficult to make all of the monthly payments each month. It’s easy to make a mistake and miss one and they may add up and become unaffordable. Using a personal loan to consolidate your debt leaves you with just one monthly payment.
Consolidating debt with a personal loan can also help you save money. Personal loan rates are higher than the interest rates for secured debts like auto loans and mortgages, but often much lower than credit card rates. If you consolidate multiple card balances into a personal loan with a lower rate, you’ll reduce the amount of interest that accrues.
To consolidate your debts through a personal loan, apply for a loan that will give you enough cash to pay off your other debts. Once you receive the money, immediately send it to your other creditors. You’ll have effectively replaced your existing loans with a single new one.
Some personal loans are marketed specifically as debt consolidation loans. In these cases, the lender may pay the proceeds directly to your creditors.
Use our debt consolidation calculator below to see how much you can save with a debt consolidation loan.
2. Pay An Unexpected Bill
One of the most common reasons to apply for a personal loan is to pay an unexpected bill. If your car breaks down, you wind up with a medical bill, or you forget about an expense like homeowners’ insurance, you can use a personal loan to borrow some cash and pay the bill.
Using a personal loan is often a better option than putting these expenses on a credit card. Credit card interest rates are high and a large balance can push your credit utilization up and harm your credit.
3. Make a Large Purchase
Personal loans make it easy to borrow thousands of dollars at one time, which makes them popular for making large purchases. What you buy is up to you.
While it might be tempting to use a personal loan to fund a lavish vacation, buy a new gaming computer or console, or purchase expensive jewelry, it probably isn’t a good idea. Remember that you’ll have to pay the loan back, plus interest.
On the other hand, some large purchases might be necessary. For example, you can use a personal loan to pay moving expenses or replace a necessary appliance that broke down unexpectedly.
4. Pay for a Wedding
A wedding is a major life event, so it’s natural to want to go all out. With the average wedding costing almost $30,000 according to the wedding website The Knot, you might struggle to come up with the cash on your own.
Just remember that if you borrow money to pay for a huge party, you’ll be paying it back, plus interest, for the next few years. A more modest wedding with less debt might make married life easier.
5. Home Improvements
If you have a home improvement project you’re looking to pay for, a personal loan could be a good option. This is especially true for smaller-scale projects where a home equity loan would be overkill. You can use personal loans to pay for things like a new coat of paint, remodeling a room, or buying furniture.
Even for larger projects, a personal loan might be the preferable option. Home equity loans and lines of credit are typically cheaper, but they’re secured by your home, which puts you at the risk of foreclosure.
A well-chosen home improvement can increase the value of your home, which can make a personal loan a worthwhile investment.
6. Fund a Business
If you have a business idea that you want to get off the ground, a personal loan can get you the funding you need to start a new company. Getting business loans can be difficult, especially for startups with no business credit and limited revenue.
Using a personal loan to fund a startup means you’re personally liable for the debt if your company goes under, but they’re still a popular option for entrepreneurs who want to fund a startup.
Are you wondering what a loan will cost, or comparing terms offered by different lenders? Plug the loan terms into this our personal loan calculator and see what your monthly payment and total interest costs will be!
Things You Can’t Use a Personal Loan For
Personal loans are popular for their flexibility, but there are still some limits on how you can use them. Most lenders won’t approve your loan if you intend to use them for these purposes.
1. Down Payment on a Home
If you’re trying to buy a home, you can’t use a personal loan to get your down payment money. Your mortgage lender will want to see that you have the cash on hand to make the down payment. If you add another loan to your credit report, it can make mortgage lenders hesitate.
2. College Tuition
Student lending is highly regulated and requires a multitude of disclosures from lenders. That’s why there are specialized student loans on the market. Most lenders won’t approve personal loans for students looking to pay tuition.
3. Illegal Activities and Gambling
It should go without saying that you can’t use a personal loan to fund illegal activities. For example, if you wanted to start a drug-dealing business, lenders would be more likely to report you to the police than approve your loan.
Though gambling may be legal in your area, lenders also will refuse to approve loans to people who intend to use the money at a casino or on the lottery.
The Bottom Line
Personal loans are designed to be versatile. Your use of the funds, within a few limitations, is your personal decision. That’s a big advantage, but it can also be a big risk.
If your credit score is decent, you can get an affordable personal loan for almost anything you want. That means that a dream vacation or luxury purchase can be just a signature away. Don’t forget that you’ll be paying that loan back for a long time, and the burden could be significant, especially if circumstances change.
Personal loans are a useful tool, but like any other tool, you need to use them wisely!