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- Personal loans can be used for almost any purpose.
- Debt consolidation, financing home improvement projects, paying for moving costs or emergency bills are some of the most common reasons to get a personal loan.
- Before applying for a loan, assess your credit and finances to avoid future financial woes.
While a personal loan can be a helpful tool for getting the cash you need in a variety of scenarios, it may not be the right solution for everyone. Assess your particular situation and needs to decide whether applying for one is the right move for you.
9 reasons to get a personal loan
It’s always important to consider your financial situation and creditworthiness before taking on any type of debt. That said, sometimes a personal loan is the best way to finance a large purchase or project that you can’t afford upfront.
1. Debt consolidation
Debt consolidation is one of the most common reasons for taking out a personal loan. When you apply for a loan and use it to pay off multiple other loans or credit cards, you’re combining all of those outstanding balances into one monthly payment. This grouping of debt makes it easier to work out a time frame to pay off your balances without getting overwhelmed.
One of the main advantages of using a personal loan to consolidate credit card debt is that these not only come with a fixed rate — protecting you from market fluctuations — but interest rates are usually lower. The average personal loan has an interest rate of just above 11 percent. Meanwhile, credit cards carry an average interest rate of nearly 21 percent.
With a lower rate, you can reduce the amount of interest you pay over time, which not only saves you money but could help you get out of debt faster. To secure the best rates, you’ll need to have good to excellent credit, plus a stable source of income or a co-signer that meets these criteria.
Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single one, potentially with a lower interest rate.
2. Alternative to payday loan
If you need some extra cash to tide things over until you get paid, using a personal loan instead of a payday loan may save you hundreds of dollars in interest charges. The average APR for a payday loan can be more than 600 percent, depending on your state. The maximum interest rate on a personal loan is typically about 36 percent.
Payday loans have short repayment terms, usually by your next payday, between two and four weeks. This quick turnaround time often makes it difficult for borrowers to repay the loan by the due date. Borrowers are usually forced to renew the loan instead, causing the accrued interest to be added to the principal. This increases the total interest owed.
Personal loans, on the other hand, have repayment terms of 12 to 84 months, giving you some additional wiggle room to pay off your balance, without incurring any extra fees.
Personal loans are cheaper and easier to repay than payday loans.
3. Home improvement projects
Homeowners can use a personal loan to upgrade their home or complete necessary repairs, like fixing the plumbing or redoing the electrical wiring.
A personal loan is a good fit for people who don’t have equity in their home or don’t want to get a home equity line of credit (HELOC) or home equity loan. Unlike home equity products, personal loans often don’t require you to use your home as collateral since they’re unsecured. Additionally, funding times are usually quicker for personal loans and they may be a better option than HELOCs or home equity loans if you’re looking to do small renovations or repairs.
A personal loan can help you fund a home improvement project if you don’t have equity in your home or if you only need to borrow a small amount.
4. Moving costs
The average cost of a local move is between $882 and $2,544, while a long-distance move costs anywhere from $2,700 to $10,000, according to Angi. If you don’t have that kind of cash on hand, you may need to take out a personal loan to pay for moving expenses.
Personal loan funds can help you move your household belongings from one place to another, purchase new furniture, transport your vehicle across the country and cover any additional expenses. Using a personal loan for moving costs can also help you stay afloat if you’re moving somewhere without a job. This way you can avoid raiding your savings or emergency fund.
If you can’t immediately afford all of the expenses associated with a long-distance move, a personal loan can help you cover those costs.
5. Emergency expenses
Sudden emergencies — like surprise medical bills — are another common reason to take out a personal loan, especially if your doctor requires payment in full. After you’ve negotiated with the hospital, doctor and insurance company, you might need an emergency loan to cover unexpected medical costs.
Emergencies around the house, such as a burst pipe, might also require quick funding while waiting for an insurance payout. In the case that you will be reimbursed for the cost, pay close attention to whether there are prepayment penalties.
Because they can be disbursed so quickly, personal loans are a good way to cover an emergency or unexpected expense.
6. Large purchases
Personal loans allow you to cover steep automotive repairs or purchase major household appliances and electronics immediately. Though you’ll have to pay interest and potentially upfront fees, you may save time and money in the long run, by avoiding having to use laundromats or rental cars and other short-term, expensive alternatives.
A personal loan can help you get new appliances as soon as you need them.
7. Vehicle financing
A personal loan is one way to cover the cost of a car, boat or RV. It’s also one way to pay for a vehicle if you’re not buying it from the company directly.
For example, if you’re buying a used car from another consumer, a personal loan will allow you to purchase the car without emptying your savings account. Additionally, since personal loans are unsecured, the vehicle wouldn’t serve as collateral. That means you would own the title right away and could sell it in case of an emergency — something that would be more complicated with an auto loan.
Using a personal loan is better than depleting your savings or emergency funds to pay for a vehicle. Personal loans can also be a viable option if you don’t want to use your vehicle as collateral with an auto loan.
8. Wedding expenses
The average couple spends around $29,000 on their wedding, according to Zola. For those who don’t have that kind of cash saved up, a personal loan can allow them to cover the costs now and repay them later.
A wedding loan can be used for big-ticket items like the venue and bride’s dress, as well as smaller expenses like flowers, photography, the cake and a wedding coordinator. If you don’t want to deplete your savings account, consider a personal loan to help make your engagement and wedding exactly the way you always dreamed it to be.
A personal loan can help you finance all of your wedding expenses upfront, which can help you avoid dipping into your savings or emergency fund.
9. Vacation costs
Your average vacation might not cost enough to necessitate taking out a personal loan, but there are moments you may want to splurge, such as your honeymoon. Whether you’ve just graduated or you’re celebrating an anniversary, personal loans can help you finance your dream vacation.
If you’re comfortable paying off your vacation for a number of years, a personal loan can help you get to your dream destination.
When not to use a personal loan
While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option:
- Your credit score is on the lower end. The lower your credit score, the higher your interest rate could be. If you have poor credit, shop around for bad-credit loans, which cater to borrowers with a less-than-perfect score.
- You can’t afford the monthly loan payments. Assess your spending plan to determine how much you can afford to pay on a loan. If you’re on a tight monthly budget, a personal loan may not make sense for you.
- You can qualify for better financing options. A personal loan also may not make sense if it’s being used for a purchase that would qualify for a better loan type. Auto, student and mortgage loans are all specialized and may be a better choice for their respective costs.
Ultimately, you want to be cautious about taking out a personal loan. It should only be used to cover immediate needs to avoid putting your long-term financial well-being at risk.
Personal loan alternatives
A personal loan may not always be the best choice for your financial situation. But there are other options available when you need money to cover a significant expense or purchase.
When using a credit card, you won’t incur any interest at all if you pay your balance in full each month. However, if you carry a balance from one month to the next, you may pay steeper interest rates than you would with a personal loan.
Home equity line of credit
If you expect to have ongoing expenses, perhaps for a remodeling project or ongoing medical bills, a HELOC may be an option to consider. HELOCs typically come with a 10-year draw period, which provides ample time to cover ongoing expenses. Many HELOCs also offer interest-only payments during the draw period.
Home equity loan
If you have enough equity in your home, a home equity loan may be another option. These loans provide a lump sum of money that you pay back in installments. Interest rates on home equity loans are typically lower than those offered on personal loans and the funds can be used for anything you want.
Withdrawing money from your retirement plan should be a last resort, but 401k loans are an option when no other form of borrowing is available. These loans don’t require meeting any lender or credit score requirements. But be sure you understand all the ramifications of taking a loan from your retirement plan, including any taxes or penalties that you may incur.
Personal line of credit
In cases where you’re unsure exactly how much money you will need, a personal line of credit can be a good choice. This type of borrowing is unsecured and revolving, which allows for borrowing what you need, as you need it.