Popular Personal Loan Uses: When To Consider This Type Of Financing
Need money to pay off high-interest-rate credit card debt? Maybe your home needs repairs that you can’t afford to pay for with cash. Or maybe your car needs a new transmission fast, and you’d rather not use your credit cards to pay for it.
These are all possible uses of a personal loan. With a personal loan, you receive a lump sum payment that you pay back over time, usually in monthly installments. You can use the funds from your personal loan to pay for anything.
Just make sure you make your loan payments on time. If you pay late, you’ll face financial penalties from your lender. And if you pay 30 days or more late, your late payment will show up on your credit reports, which could cause your credit score to fall by 100 points or more.
Be careful, too, of your personal loan’s interest rate. The higher the rate, the higher your monthly payment. If your credit is weak, you might be hit with a higher rate, meaning that you’ll pay more over time when repaying your loan. Depending on what you need the money for, you might find a cheaper alternative.
If you do need emergency cash, though, a personal loan is an option. Just be sure to look for the right loan. There are many types of personal loans available. You want to find the one with the lowest interest rate.
Good Reasons For Using A Personal Loan
You can use the funds for a personal loan to pay for anything. But some of the better uses include paying down credit card debt, covering unexpected financial emergencies or funding the cost of a home repair.
Here are some of the more common reasons for using a personal loan.
Debt consolidation is one of the most popular uses for personal loans. This isn’t surprising: Many credit cards charge interest rates of 19% or higher. If you rack up thousands of dollars in credit card debts, these high interest rates can cause the amount that you owe to soar each month.
That’s where personal loans can help. You can take out a personal loan and use the cash from it to pay off your high-interest-rate credit card debt. You’d then pay back your personal loan in regular monthly installments.
This is a smart financial move if you can nab a lower interest rate on your personal loan than what you are paying on your credit card debt. Say your credit card charges you an interest rate of 18.99%. If you qualify for a personal loan with an interest rate of 10.3%, you can save yourself a significant amount of interest by swapping your higher-rate credit card debt with a personal loan.
Just make sure that you don’t run up your credit card debt again. Doing so will leave you in even worse financial shape as you’ll now have a personal loan to pay off in addition to your new credit card debt.
Many homeowners turn to home equity loans or cash-out refinances to cover the costs of expensive home repairs or improvements. But to take out one of these loans, you’ll need enough equity in your home. If your home is worth $250,000 and you owe $100,000 on your mortgage, you have $150,000 of equity that you can borrow against in the form of one of these loan types.
But what if you’ve recently bought your home and haven’t built up enough equity? Or what if you don’t have any equity in your home at all? If your home is worth $250,000 and you owe $245,000 on your mortgage, you might not have enough equity to take out a home equity loan or cash-out refinance.
Instead, though, you can apply for an unsecured personal loan. An unsecured loan is one in which you aren’t putting up any collateral. In a home equity loan, your home is your collateral. If you don’t pay back your loan, your lender can file a foreclosure action against you and possibly take your home.
With an unsecured loan, there is no collateral for your lender to take should you stop making your payments. This makes these loans riskier, which is why lenders typically charge higher interest rates for them.
You can use a personal loan, though, to pay for smaller and medium-sized repairs and improvements to your home. Your interest rate will be higher than with a home equity loan or cash-out refinance. But these are options if you don’t have enough equity.
Moving to a new home isn't cheap. ConsumerAffairs estimates that it costs $600 – $1,000 to hire movers for a local move, a move from one location in your state to another. Moving to another state, though, can be more expensive: ConsumerAffairs estimates that it costs an average of $5,000 for a move that crosses state lines. The costs of such a move can soar to $10,000, according to the publication.
It can be challenging to pay for these expenses out of pocket. A personal loan can give you the cash you need to tackle moving expenses such as hiring professional movers, buying packing supplies, renting a moving truck or purchasing new furniture.
No one likes unexpected expenses. And when these expenses are emergencies that can’t be ignored? They’re even more unwelcome.
These unexpected bills are another reason why people turn to personal loans. Taking out a loan with an interest rate of 11% is a better choice for paying off unexpected emergencies than is putting these surprise expenses on a credit card that charges 19% interest.
Some of the unexpected expenses you might cover with a personal loan include:
- Medical bills
- Car repairs
- Funeral expenses
- Job loss
- Unexpected travel
Need to make a large purchase, such as new furniture for your apartment or a new computer for your freelance career? A personal loan might be a better option than putting this large expense on a credit card with a high interest rate. A personal loan is a better choice, too, than emptying your savings account to pay for a large purchase. If you deplete your savings, you’re left vulnerable should you get hit with unexpected expenses.
If you need to buy a car and your credit score is too low to qualify for a traditional auto loan, a personal loan can help. Because personal loans charge higher interest rates than do auto loans, you can usually qualify for them with a lower credit score.
Using a personal loan, though, might limit the type of car you can buy. Personal loans tend to have lower maximums than do traditional auto loans, limiting how expensive your new car can be.
The average cost of a wedding hit $28,000 in 2021, according to the Knot's Real Weddings Study. That's a lot of money. If you need help paying for that DJ, caterer, dress and reception hall, a personal loan might help.
FAQs About Personal Loan Uses
Want to learn more about personal loans? Read our personal loan FAQs.
What can I use a personal loan for?
A personal loan is a loan that usually doesn’t require any collateral. That sets it apart from vehicle or mortgage loans. In those loans, known as secured loans, your car or home act as collateral. If you fail to repay your loan, your lender can foreclose on your home or repossess your car. With a personal loan, which is typically an unsecured loan, there is no physical asset for lenders to take should you stop making your payments.
In other ways, though, a personal loan acts like any other loan: You borrow a lump sum of money and repay it in monthly payments. Your lender will charge interest on the money you borrow. When you make your monthly payments, part of your payment will go toward your loan’s principal balance, while part will cover interest.
When should I not use a personal loan?
While a personal loan can help you pay for many expenses, there are times when it isn’t appropriate.
- Paying for college tuition: If you need loans to pay for college tuition, it makes more sense to apply for government or private student loans. Student loans typically come with lower interest rates, and federal student loans come with certain protections if you face financial struggles.
- Covering vacation costs: A vacation is a want, not a need. It doesn’t make sense to take out any loan to cover vacation costs. It’s better to save your money for a vacation before taking your trip. You don’t want to incur debt for a vacation, no matter how low the interest rate attached to it.
- Funding a major home remodeling project: While personal loans might be a good choice for funding smaller home repairs or maintenance costs, they don’t work well to pay for major home remodeling projects. That’s because major remodeling work typically costs more than what you can borrow with most personal loans. Large remodeling projects also tend to get more expensive as contractors work, meaning that you might need the flexibility of a home equity line of credit to cover these rising costs.
Where can I get a personal loan?
You can get personal loans through banks and credit unions. Many private lenders also offer personal loans. To qualify for one of these loans, you might need to provide proof of your income in the form of copies of your most recent paycheck stubs, bank account statements and tax returns. Lenders will also check your credit reports and three-digit credit score.
The Bottom Line
There are many reasons why you might need a personal loan, from covering an emergency car repair to paying off high-interest-rate credit card debt. If you’re ready to apply for a personal loan, fill out an online application with us. We’re happy to walk you through the process.