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Personal loans typically have fixed interest rates, fixed monthly payments, and a set repayment plan that lets the borrower know exactly what they’re getting into beforehand. This makes personal loans far more predictable than credit cards, which often have variable rates and fluctuating payments.
Additionally, most personal loans are unsecured, so they won’t have any collateral requirements for eligible applicants. The fact that personal loans provide borrowers with a lump sum of cash for nearly any purpose can also be enticing, particularly for borrowers planning to use their loan funds for more than one goal.
Key Takeaways
- Personal loan funds are often used for debt consolidation. This allows borrowers to essentially combine their debts into a single loan, which can help them save money in the long run.
- Outside of managing debt, personal loans can be used for a wide variety of major purchases and expenses, including home improvements, medical bills, and funding a new business.
- Despite how highly versatile personal loans can be, there are circumstances in which taking on new debt isn’t a good idea. If you cannot afford to repay a personal loan and/or your debt is already spiraling out of control, then you may want to consider an alternate source of funding.
Top 10 Reasons to Get a Personal Loan
What are the best reasons to get a personal loan, and when should you not get one? Consider the following 10 uses for a personal loan before taking on any new debt with one.
1. Debt Consolidation
Debt consolidation is one common use of personal loan funds, particularly among consumers who have high-interest credit card debt. By consolidating debt with a personal loan, the borrower receives a fixed interest rate and a set repayment plan that eventually ends with them having paid off the combined debt.
How much can a borrower save by consolidating their debt? That really depends on how much they owe, the interest rates on their extant loans, and how much they can afford to pay each month. According to the Board of Governors of the Federal Reserve System, the average interest rate among credit card accounts assessed interest was at 20.92% as of February 2023, compared to the average rate of 11.48% across 24-month personal loans.
2. Home Improvements
When you take out a home equity loan or home equity line of credit (HELOC) to fund home improvements, either loan type would use the value of your home as collateral. This typically means that equity loans have lower interest rates than, say, personal loans, since the collateral makes them a safer bet for banks; however, you’re putting your property at risk of seizure if you fail to make your loan payments.
Because most personal loans are unsecured, you won’t put your home on the line by using a personal loan to pay for a kitchen remodeling, a room addition, new carpet, or upgraded appliances.
3. Moving Expenses
Moving expenses can vary depending on where you’re moving to (and from), how many things you own, and how much help you actually need. For example, you’ll pay more for movers to pack up all of your belongings for you than you would if you just need professional help moving furniture and other heavy items.
Either way, the right personal loan will allow you to borrow an amount appropriate to your needs.
4. Medical Expenses
Medical expenses can become overwhelming in a hurry, and no one wants their long-term medical debt to get out of hand. With a personal loan, you may be able to consolidate and more easily pay down medical debt and other healthcare-related expenses over time.
5. Large Purchase
Maybe you want to finance a new set of furniture for your living room or are planning an anniversary vacation, but you don’t have the cash to pay upfront. In either case, a personal loan provides you with a way to borrow money that won’t leave you guessing how much you owe or when you’ll become debt free.
Additionally, as previously mentioned, using a personal loan for a large purchase almost always leaves you with a lower interest rate than a credit card would.
6. Wedding Expenses
According to The Knot Real Weddings Study from 2022, the average cost of a wedding was approximately $30,000 that year. While you may be able to cover these costs with a credit card or another type of loan, the lower interest rate that most personal loans have will likely save you the most money in the long run.
7. Startup Business Costs
Maybe you want to start your own business, but you’re not quite established enough to qualify for a business loan or a business credit card. In that case, you can get a personal loan to fund your business venture.
8. Tax Bills
If you owe state or federal taxes and aren’t prepared for the amount you’re required to pay, a personal loan may help you weather a tax season. You’ll obviously have to pay back the funds you borrow, but a personal loan can provide you with the funds needed to avoid legal and financial penalties from failing to pay your taxes.
9. Divorce Expenses
The costs required to get a divorce can be steep, depending on how much legal help you need. A personal loan can provide you with a way to pay upfront for the legal expenses required for a divorce, likely giving you some much-needed breathing room, while just requiring you to pay back what you owe in installments over a set timeline.
10. Adoption Costs
According to a report from the U.S. Child Welfare Information Gateway, the average cost for domestic or international adoption via a private agency can range from $30,000 to $60,000. Paying that much upfront to adopt a child obviously isn’t an option for everyone, but a personal loan could make this a possibility for more people.
When Not to Use a Personal Loan
There are also a few scenarios in which a personal loan isn’t a borrower’s best option. Here’s when you shouldn’t get a personal loan or should consider an alternate source of funding:
- You don’t have a specific use for the funds. Borrowing money for no reason is a great way to wind up in long-term debt.
- You can’t afford the payment. If you used a personal loan calculator and have found that the monthly payment won’t fit in your budget, you should avoid taking out a loan.
- Your debt is spiraling out of control. If you need to keep borrowing just to keep your finances afloat, a personal loan will only help you in the short term.
- You have bad credit. Interest rates on bad-credit personal loans are typically exceptionally high, so you should avoid them if you can.
What Is a Good Annual Percentage Rate (APR) on a Personal Loan?
What Are the Requirements to Get Approved for a Personal Loan?
Eligibility requirements for personal loans vary, but lenders typically look at your credit score, your income, and your employment history when reviewing loan applications.
If you’re curious about whether or not you’ll be approved for a personal loan, as well as what interest rate you would have to pay, look for lenders that let you check your rate without a hard inquiry.
What Are Some Disadvantages of a Personal Loan?
Personal loans can have higher interest rates if the applicant has fair or poor credit. Not only that, but they usually don’t have many of the short-term perks that some credit cards do. For example, many credit cards offer 0% introductory APR for a limited time, whereas personal loans do not.
The Bottom Line
There are many reasons to consider a personal loan, but you should only borrow money when you have a plan to pay it back. Additionally, make sure you have a purpose for the loan, whether you need funds for debt consolidation, home improvements, or another goal.
Once you do take out a personal loan, create a plan to ensure that you’ll make required payments early or on time each month. Doing so can help improve your credit while you pay down your debt, and that’s the best-case scenario for all parties involved.
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