At a Glance
Need to get your hands on some cash fast in order to consolidate your debt, fund a renovation or purchase, or pay your bills? A personal loan may be the right choice for you.
In this article, learn more about:
What are personal loans used for?
There are several good reasons to get a personal loan; however, it’s important to carefully consider your financial situation and goals before taking on a loan, especially because it can impact your credit score and you’ll have to pay interest.
However, personal loans can be a great way to finance a large purchase, project, or event that you can’t afford to pay for up front. A few reasons to get a personal loan include:
1. Consolidating debt: If you have multiple other loans or credit cards, you can use a personal loan to consolidate debt, especially since personal loans can have a lower interest rate, which would save you money.
2. Building credit history: If you don’t have a long credit history or your credit score could use improvement, taking out a personal loan to improve credit score can help.
3. Completing home improvements: Upgrade your home or complete necessary repairs using funds from a personal loan, especially if you don’t want to get a HELOC or home equity loan.
Compare: Best Home Improvement Loans
4. Paying off student debt. You can use a personal loan to consolidate or pay off private student loans.
5. Funding higher education: Even if you have student loans to pay for post-secondary education, those funds typically can’t be used for rent or utilities, books, or other types of costs. Personal loan funds can help ease that financial burden.
Related: Personal Loans for Students
6. Paying medical expenses: Even if you have health insurance, it may not always cover any or all of the cost of a service or procedure, leaving you stuck with a large medical bill. If you don’t have health insurance, these costs can be even higher. Use a personal loan for medical expenses.
7. Moving or relocation: Moving costs can add up quickly, especially if you have to rent a moving truck and equipment or hire a moving company. Use personal loan to pay for these relocation expenses, buy new furniture or appliances, or handle other costs.
8. Vacation loans: Vacation loans or travel loans are personal loans that are used exclusively for vacation expenses that can include airfare for travel, renting a hotel room or cottage, rental cars, and spending money.
9. Wedding loans: A wedding loan is a type of personal loan that can be used to finance wedding-related expenses. They usually have a fixed interest rate and a repayment period of three to five years. They can cover everything from the cost of a wedding dress, wedding rings, the honeymoon, and other wedding-related bills.
10. Auto loans: Auto loans are a type of loan that is specifically used to finance the purchase of a vehicle. The loan is typically secured by the vehicle itself, which means that if you default on the loan, the lender can repossess the car. They typically have relatively low interest rates and monthly payments, making them a popular choice for financing a new car.
Compare: Best Personal Loans to Buy a Car
11. Covering emergency or unexpected expenses: Protect your savings and don’t worry about not being able to afford emergency or unexpected expenses by using a personal loan.
Compare: Best Emergency Loans
How do personal loans work?
Personal loans can be used for just about anything. Offered by most banks, credit unions, online lenders and peer-to-peer lenders, personal loans:
- Are unsecured, meaning they are not backed by collateral like your car or house.
- Come in amounts ranging from $1,000-$100,000.
- Typically have fixed interest rates, meaning the monthly payment stays the same over the life of the loan.
- Have interest rates ranging from 2.49% to 35.99% depending on your credit score, credit history, income, and other factors.
Applying for a personal loan can typically be done online, and the application process is quick. Once you’re approved, which can take around 2-7 business days, the funds will be deposited into your bank account in one lump sum. This transfer can take as little as 24 hours up to one week depending on your institution and the lender, but once you receive the funds, you can use them for whatever you need.
Then, you’ll start making monthly payments on the loan principal and interest.
Learn more: How Do Personal Loans Work?
Features to consider before taking out a personal loan
Before taking out a personal loan, you should ask yourself the following questions to ensure it’s the right move for your financial situation:
- Why do I need a loan? Don’t take out a loan just to have the extra funds, especially because you’ll have to pay interest on it, which means you’ll end up paying more than the original amount. Make sure it’s really necessary to borrow.
- What is the cost of borrowing? Add up the total cost, including fees and interest, to ensure it’s something that can fit into your budget. Some lenders allow you to prequalify without impacting your credit score, which can help you better understand costs.
- Can I handle more debt? Do you already have debt? Are you struggling to pay it back? If so, it may not make sense to take on more debt (unless using it to consolidate).
- Are the monthly payments affordable? Using a personal loan calculator to estimate your monthly payments, be sure it fits into your budget and you’ll be able to make the payments each month.
Learn more: Features to Look for in a Personal Loan
How to choose the best personal loan?
Once you’ve narrowed down lenders that provide the personal loan features you’re looking for, and you’ve calculated what you can afford, it’s time to decide. Narrow down your options by analyzing:
|Feature||Questions to ask|
|Credit check||Can you prequalify for the loan with a soft credit check, which won’t affect your credit score?|
|APR||Is the APR affordable? Are there ways you can improve your credit score to secure a lower APR?|
|Repayment Terms||Do you have the option to have a shorter term, making your monthly payments slightly higher but paying less in interest? Or, can you have a longer term, making your monthly payments lower, but having to pay more in interest over the life of the loan? Which is the best option for your financial situation?|
|Loan Amount||Can you secure a loan for the amount you need?|
|Fees||What are the fees? Are there prepayment penalties?|
|Special Features||Does the lender offer discounts? Protection? Coaching or education? Other perks?|
|Customer service||Can you find reviews or ratings from existing customers? Are they positive? What do people say about the customer service, getting their questions answered, and assistance they receive?|
For most borrowers, the best personal loan is one with a lower APR, affordable monthly payments, manageable repayment terms, and little or no fees or penalties. If you’re on the fence with multiple lenders that meet your needs, look into the special features, customer service and reviews.
Benefits of choosing a personal loan over other types of debt
There are multiple different types of debt that you can incur depending on your needs and financial situation. However, taking out a personal loan can have several benefits compared to other types of debt:
1. Credit cards typically have a much higher interest rate than personal loans. This means if you don’t pay off your credit cards in full each month, the interest will increase the total amount you owe much faster. Personal loans typically have a lower interest rate, and if you use a personal loan to consolidate credit card debt, it can save you money in the long-run.
Related: How to Consolidate Credit Card Debt?
2. Some loans, such as HEL, HELOCs, or auto loans, require collateral like your car, house, or other asset. If you stop paying off the loan, the asset can be repossessed, or your home could be foreclosed on. Personal loans are unsecured, meaning they do not require collateral.
3. Federal student loans and some private student loans have restrictions for what the loan can be used for. For example, they can typically only go to pay tuition and for on-campus housing or other fees associated with tuition. You can use personal loan funds for almost anything.
4. If you have multiple kinds of debt, keeping track of payments, due dates, interest rates, and balances can be challenging. Using a personal loan to consolidate debt can make managing repayments easier since you can use the funds to pay off all of your outstanding debt and have only one monthly payment moving forward.
5. Most personal loans have fixed interest rates, which means the interest rate will not change over the life of the loan and your monthly payments will also stay the same. Some debt has variable interest rates, which means the interest rate can change over time. This not only causes your monthly payment to vary, but it could also mean you end up paying more while you have the loan.
6. Unlike other types of debt, you can still qualify for a personal loan even if you don’t have great credit. And if you have a co-signer or do use collateral for the loan, you can still qualify for lower interest rates than other types of debt.
How to get a personal loan?
The process of getting a personal loan is relatively easy, and in most cases can be done completely online:
1. Start by shopping around, comparing different lenders to find one that offers the best term and interest rate for the loan amount you want.
2. Of these lenders, get prequalified if you can. This allows you to see your potential interest rates, terms, and monthly payments before you apply. And, because this only requires a soft credit check, your credit score will not be impacted.
3. Once you’ve decided which lender to choose, it’s time to apply. You can fill out an application online, or you may have to initiate the process in person at a local branch.
4. Once you submit your application, it will be reviewed by the lender.
5. If approved, you’ll receive the funds deposited in your account in as little as 24 hours or up to a few business days. If you weren’t approved, consider adding a co-signer or choosing a secured personal loan.
Learn more: How to Get a Personal Loan in 7 Steps?
Unlike other types of loans that can only be used for specific purposes, personal loans can be used for almost anything. This includes consolidating debt, covering moving costs or medical bills, paying for a wedding or vacation, supporting home renovations, and more.
Most lenders allow you to prequalify for a personal loan without a negative impact on your credit score. Most often you can do this online. Simply fill out the pre-qualification form, undergo the soft credit check, and find out if you’re approved. Then, you can formally apply for the funds.
When you apply for a personal loan, the lender will run a hard credit inquiry, which will temporarily decrease your credit score by a few points. However, if you make your payments on time and pay the full monthly balance each month, this can help your score because you’re showing you’re a responsible borrower. However, try to avoid taking on other kinds of debt while you have the loan to keep your debt-to-income ratio and credit utilization low; otherwise, you may see your score go down.
Personal loans can be used for virtually any purpose, with loan amounts ranging from $1,000-$100,000. This means that a person can absolutely use a personal loan to fund pet-related expenses. Be aware that some veterinarians may offer their own lending options that may have lower interest rates.
Related: Pet Financing
Yes, personal loans can be used to finance funeral expenses, or any other general purpose. Personal loans amounts range up to $100,000 which means expenses such as the ceremony or coffin could be covered under the loan.
Learn more: Funeral Loans
The primary risks include high interest rates (if you have poor credit), fees, damage to your credit score (especially if you make late or miss payments), and additional debt burden.
To get the best interest rates and repayment terms, it’s best to have a credit score of at least 670 or higher (the higher your score, the better the interest rate and repayment terms). However, you may be able to find an online lender or credit union who may approve a borrower with a score as low as 560 – 610.
Technically yes, you may be able to pay your taxes with a personal loan. However, it likely isn’t the best option due to the interest you’ll have to pay and the debt burden you’re risking.