Table of Contents
- 1 How personal loans work
- 2 9 reasons to get a personal loan
- 3 When not to use a personal loan
- 4 Final considerations
- 5 How to get a personal loan
- 6 The bottom line
Personal loans are borrowed money that can be used for large purchases, debt consolidation, emergency expenses and much more. These loans are paid back in monthly installments over the course of typically two to six years, but it can take longer depending on your circumstances and how diligent you are with making payments.
Here are the top six reasons to get a personal loan and when they make sense:
- Debt consolidation.
- Alternative to a payday loan.
- Home remodeling.
- Moving costs.
- Emergency expenses.
- Appliance purchases.
- Vehicle financing.
- Wedding expenses.
- Vacation costs.
How personal loans work
Once you get approved for a personal loan, the funds you receive will be disbursed in a lump sum. Depending on the lender or bank that you choose to borrow from, you could get the money in a few weeks, or even a few days. You’ll then make equal monthly payments for the duration of your repayment period.
Personal loans come in two forms: secured and unsecured. Secured loans require you to put up collateral, which could be your home or property. If you fail to pay back your loan, the bank could seize that collateral. Unsecured loans don’t require you to put up anything as collateral but typically require a higher credit score. If you fail to pay back an unsecured loan, you run the risk of being sued or having a lawsuit filed against you by the lender or bank.
9 reasons to get a personal loan
While it’s always important to carefully consider your financial situation before taking on a loan, sometimes a personal loan is the best way to finance a large purchase or project that you can’t afford upfront. Here are the top nine reasons to get a personal loan.
1. Debt consolidation
Debt consolidation is one of the most common reasons for taking out a personal loan. When you apply for a loan and use it to pay off multiple other loans or credit cards, you’re combining all of those outstanding balances into one monthly payment. This grouping of debt makes it easier to work out a time frame to pay off your balances without getting overwhelmed.
One of the best advantages of using a personal loan to pay off your credit cards is the lower interest rates. With lower rates, you can reduce the amount of interest you pay and the amount of time it takes to pay off the debt. Consolidation allows you to pay off credit cards in finite terms with a clear end date in sight.
Who this benefits most: Those with multiple sources of high interest debt.
Takeaway: Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single payment with a lower interest rate.
2. Alternative to a payday loan
If you’re facing financial hardships, you may be tempted to take out a payday loan to help you get by. However, payday loans are often predatory and can leave you much worse off than before.
Though payday loans may be easier to get, they carry extreme risks if you can’t pay back the amount owed in the time agreed upon. Some payday lenders charge interest rates in excess of 400 percent. Personal loans, on the other hand, are typically more straightforward and incur much lower APRs, even if you have poor credit.
Who this benefits most: Borrowers with less-than-stellar credit.
Takeaway: Personal loans are cheaper and safer than payday loans.
3. Home remodeling
A personal loan can be a great option to pay for home remodeling, whether you want to put on a new roof, install solar panels, remodel your kitchen or add a swimming pool.
Furthermore, a personal loan is a good fit for people who don’t have equity in their home or don’t want to get a home equity line of credit or home equity loan. Unlike home equity products, personal loans often don’t require you to use your home as collateral. In that way, they are less risky.
Who this benefits most: Those looking to finance a small to mid-sized home improvement project or upgrade.
Takeaway: A personal loan can help you fund a home improvement project if you don’t have equity in your home and don’t want to borrow a secured loan.
4. Moving costs
You probably won’t need to take out a personal loan to relocate over a short distance. However, if you’re facing a long-distance move, costs can be expensive enough to warrant applying for a personal loan.
Personal loan funds can help you move your household belongings from one place to another, purchase new furniture for your new residence, transport your vehicle across the country and cover any additional expenses.
Before pursuing a personal loan to help cover your big move, consider whether your income will enable you to pay off your loan balance. This consideration will help you avoid the added stress of paying off your personal loan on top of moving to a new location.
Who this benefits most: Those embarking on a long-distance move and anticipating thousands of dollars in expenses.
Takeaway: If you can’t immediately afford all of the expenses associated with a long-distance move, a personal loan can help you cover those costs.
5. Emergency expenses
Finance funeral expenses
Though it’s uncomfortable to consider, personal loans can be a helpful resource in the event of a family member’s death. In short, funerals are expensive. Between the burial plot, casket, funeral home services and other factors, costs can quickly add up to thousands of dollars.
If a deceased person’s estate can’t afford those expenses, a family member or other person may choose to apply for a personal loan to cover the deceased’s final costs.
Pay medical bills
Medical expenses are another significant reason people go to lenders for personal loans. Common medical treatments that may require the use of a personal loan include dental work, cosmetic surgery, fertility treatments and other procedures that can cost $5,000 or more. Ancillary expenses like medical travel, parking, medications, service animals and aftercare also can be effectively financed by a personal loan.
Who this benefits most: Those in need of unexpected or emergency funds.
Takeaway: Because they can be disbursed so quickly, personal loans are a good way to cover an emergency or unexpected expense.
6. Appliance purchases
Household disasters can strike unexpectedly. If you suddenly need to buy a new washer and dryer but don’t have the funds on hand, a personal loan can provide relief. Other large purchases, such as an entertainment center or gaming computers, can also end up costing more than what you have in your checking or savings account.
Personal loans allow you to purchase major household appliances and electronics immediately, rather than having to wait months to save up for them. Though you’ll have to pay interest and potentially upfront fees, a personal loan can save you time and money in the long run, since you’ll be able to avoid using laundromats and other short-term but expensive alternatives.
Who this benefits most: Those looking to make a bigger household purchase now to save time and money in the future.
Takeaway: A personal loan can help you get new appliances as soon as you need them.
7. Vehicle financing
You can also apply for a personal loan when considering a larger purchase like a car, boat, recreational vehicle or even private jet. After all, most people aren’t walking around with tens of thousands of dollars at their disposal.
Examples of other large purchases that may require a personal loan include tiny homes, motorcycles, snowmobiles and horses (including the trailer, saddle and other equestrian equipment).
Who this benefits most: People looking to purchase a new vehicle.
Takeaway: Using a personal loan is better than depleting your savings or emergency funds when paying for larger expenses.
8. Wedding expenses
In some cases, it’s a good idea to take out a personal loan before you walk down the aisle. A wedding loan can be used for big-ticket items like the venue and bride’s dress, as well as smaller expenses like flowers, photography, the cake and a wedding coordinator.
You can also consider paying for the engagement ring with a personal loan. Depending on the kind of ring you’re getting, engagement rings can easily cost several months’ worth of your salary. If you don’t want to deplete your savings account, consider a personal loan to help make your engagement and wedding exactly the way you always dreamed it to be.
Who this benefits most: Those looking to finance their wedding expenses.
Takeaway: A personal loan can help you finance all of your wedding expenses upfront, which can help you avoid dipping into your savings or emergency fund.
9. Vacation costs
Your average vacation might not cost enough to necessitate taking out a personal loan, but what about a honeymoon or a luxury cruise? Whether you’ve just graduated and want to go on a trip or you’re celebrating an anniversary, personal loans can help you finance your dream vacation.
Who this benefits most: Those paying for a lavish or larger vacation.
Takeaway: If you’re comfortable paying off your vacation for a number of years, a personal loan can help you get to your dream destination.
When not to use a personal loan
While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option. Before applying, consider your financial situation and the reason for taking out the loan. “Individuals for whom a personal loan would not make sense would include anyone with fair or below credit who may be subject to a very high interest rate,” says Lauren Anastasio, CFP at SoFi. The lower your credit score, the higher your interest rate could be. If you have poor credit, shop around for bad-credit loans, which cater to borrowers with a less-than-perfect score.
A personal loan also may not make sense if the loan is used for a purchase that would qualify for a better loan type, says Anastasio. “This would be applicable to real estate, automobiles and education. Mortgages, car loans and student loans are all designed specifically to fund a particular expense and each come with features and benefits that personal loans do not offer.” Consider the reason why you’re applying for a personal loan and if you’d be better off with a loan designed specifically for that purpose.
Lastly, if you’re on a tight monthly budget, a personal loan may not make sense for you, says Anastasio. “Some may find that the payment on a personal loan would be higher than their various minimum payment requirements combined.” This can potentially leave you with more accumulating debt and a cash flow crunch.
Personal loans are a great way to finance a multitude of expenses and consolidate debt. Keep in mind, however, that your loan amount, credit score, income and overall creditworthiness will impact your interest rate.
To avoid being stuck in high-interest debt for years down the road, do your research to find competitive rates, avoid any hidden fees and estimate your monthly payments.
How to get a personal loan
You can apply for a personal loan through an online lender, a bank or a credit union. Whichever route you choose, the application process is fairly similar. You’ll want to consider your borrowing options and loan types, shop around to find the most competitive rates and fees, pick a lender and apply. Most lenders allow you to get prequalified, letting you see your potential interest rates and terms before you apply. If you find a lender you like, you’ll then submit a complete application with your loan details, personal information and income verification documents.
At the end of the day, a personal loan can be used for almost anything – even beyond the options listed here.
And though there are many different reasons to take out a personal loan, remember that no matter the circumstance, it must be paid back eventually. When you take out a personal loan to pay off credit cards or to throw the perfect wedding, you are borrowing money that must be repaid with interest on top. Personal loans are a great way to consolidate debt and make major purchases, but you should always utilize this financial resource responsibly.