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 and history, though, will impact whether you’re approved and what rates and terms you’re offered. Here’s why some people take out personal loans and when their loan purpose matters.
What does loan purpose mean?
Your loan purpose is the reason you want to borrow money. When you fill out a loan application, you might come across a section that asks for the purpose of the loan. Some lenders do this to ensure you ask for the right product. They can also use your loan purpose to assess risk and assign loan terms.
Reasons for taking out a personal loan
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, get your work hours reduced or have an emergency medical bill, a personal loan can meet your needs in the short term.
- Debt consolidation: You can save money on interest payments when you consolidate high-interest credit card debt with a personal loan. The average credit card interest rate right now is around 16 percent, although it can go to 20 percent depending on your credit score and credit card issuer. Personal loan interest rates currently average less than 11 percent. 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 bursts or your air conditioning goes out, 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 extra cash to pay for costs that add up.
- Funeral and end-of-life needs: A personal loan can pay for the funeral, burial and related end-of-life costs when a loved one dies.
- Large purchases: You can use a personal loan to buy a recreational vehicle such as a boat, an RV, or a private jet or to make purchases for your quality of life. You can also use a personal loan to spread out the costs of purchases that would take a significant chunk out of your budget, such as dental bills, new appliances and veterinary expenses.
Does the reason for taking out a personal loan matter?
Your reason to get a personal loan can impact the type of loan you take out, as well as the loan amount and interest rate you get.
Some lenders have a specific type of borrower they will lend to. For instance, Payoff is a lender that serves only 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’ll need to look elsewhere.
LightStream has interest rates based on your loan purpose. For instance, as of mid-July 2021, a new auto loan purchase has rates as low as 2.49 percent APR, but K-12 education loans start at 5.93 percent APR.
Why this is important
While many lenders are ready to accommodate your needs, it’s important to remember that your loan purpose 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 from lenders that are offering personal loans for your needs. Review credit requirements, such as your credit score, history and income qualifications.
The bottom line
Your reason for getting a personal loan 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. Avoid borrowing more money than you need, and find a lender that has a sensible repayment plan.