Taking out a personal loan is exactly that — personal. Even though many lenders will ask about the reason for your loan, most reasons won’t stop you from obtaining a personal loan. Your credit score, history and terms, though, could impact your approval. Here’s why some people take out personal loans and when that reason matters.
Reasons to take out a personal loan
While your personal loan reasons are personal, there are many reasons you may want to consider taking out a personal loan, including:
- Emergencies: If you need to pay bills right now and don’t want to be late, you can take out an emergency loan to cover those costs. If you lose your job, face reduced hours or have an emergency medical bill, taking out a personal loan can meet your needs in the short term.
- Consolidating debt: If you have high-interest credit card debt, you can save money on interest payments when you consolidate with a personal loan. The average credit card interest rate right now is around 16.02 percent, although it can go well into 20 percent, depending on your credit score and credit card issuer. Personal loan interest rates average about 11.88. If you have stellar credit, you could secure the lowest interest rate available, which is oftentimes much less.
- Home improvements or repairs: If a water pipe burst or your air conditioning went down, a home improvement loan can pay for repairs if you don’t have the cash and don’t want to use your credit card.
- Child-related costs: If you want to expand your family, a personal loan can cover the costs of fertility treatments, adoption expenses or hospital bills that come from labor and delivery or needs after your child comes home.
- Major life milestones: If you’re planning a big move for a new job or helping a grown child pay for a wedding, you may need some extra cash to pay for costs that add up.
- Funeral and end-of-life needs: If you had a parent or loved one die, a personal loan can pay for the funeral, burial and related end-of-life costs.
- Large purchases: If you want to buy a recreational vehicle, like a boat, an RV, or a private jet, or need to make purchases for your quality of life, you can use a personal loan to pay for it.
Does the reason for taking out a personal loan matter?
Your personal loan reasoning is yours, but it can impact the type of loan you take out, how much you can take out and your interest rate.
Some lenders have a specific niche for the type of borrower they will lend to. For instance, Payoff is a lender that targets borrowers with credit card debt. If you’re looking for a debt consolidation personal loan, that might be a lender to consider. But if you’re looking for a home improvement loan, you may need to look elsewhere.
LightStream, on the other hand, has specific interest rates based on your loan purpose. For instance, a new auto loan purchase has interest rates as low as 3.49 percent, but education loans start at 5.95 percent.
Why this is important
While many lenders are ready to accommodate your needs, it’s important to remember that your reasoning can impact your interest rate and terms. Some lenders have a minimum amount you can borrow depending on why you need a personal loan.
To make sure you’re getting the best deal, compare interest rates, terms and fees between lenders that are offering personal loans for your needs. Review credit requirements, like your credit score, history and income qualifications. Also check out term lengths. Sometimes you need a small personal loan that you can repay over the course of a year. Sometimes you need a larger loan that could take a few years to pay back.
The bottom line
Your personal loan reason is yours, but your potential lender can determine important loan factors based on that reasoning. Regardless of why you need a personal loan, compare lenders to see which one offers the best deal based on your needs. Try to avoid taking out more than you need and find one that has a friendly repayment plan. If you can’t make payments on your loan, see if any lenders will work with you to pause payments without impacting your credit score.