The top 9 reasons for personal loans
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Personal loans are borrowed money that can be used for large purchases, debt consolidation, emergency expenses and much more. These loans are paid back in monthly installments over the course of a few months or upwards of a few years. It can take longer depending on your circumstances and how diligent you are with making payments.
In some cases, you might want to try something else before taking out a personal loan, like a small purchase or negotiating a lower price or cost. Here are the top nine reasons to get a personal loan and when they make sense.
How personal loans work
After you’re approved for a personal loan, the funds you receive will be deposited into your bank account in a lump sum. The transfer may take as little as 24 hours or as long as a few weeks, depending on the lender. You’ll have to start making monthly payments as soon as the loan is disbursed.
Most personal loans have fixed interest rates, which means that your payments will stay the same every month. Personal loans are also typically unsecured, meaning there’s no collateral behind the loan. If you don’t qualify for an unsecured personal loan, you may have to use collateral to be approved, like a savings account or certificate of deposit. You can also ask a friend or family member to co-sign on your personal loan to help you get approved.
Whatever your loan purpose, you’ll likely have several options available to you. Financing is available through credit cards, home equity loans and more. However, in many cases, personal loans are an ideal solution for consumers. Personal loans are often less expensive than credit cards, and funding is faster than with home equity loans or HELOCs.
Additionally, because there’s usually no collateral tied to a personal loan, it’s a less risky form of financing than secured loans like home equity products — meaning your home, vehicle or savings account is not immediately at risk if you default.
How to tell if a personal loan is right for you
If you need a quick influx of cash to pay for necessary expenses, a personal loan may be a good option. Interest rates for personal loans are usually lower than those of credit cards, especially if you have an excellent credit score.
Of course, you should always weigh the benefits with the drawbacks. After all, taking on a personal loan means taking on debt, and you’ll need to be prepared to make payments on that debt for a few years. If you don’t have the monthly budget for principal payments plus interest, reconsider the amount you need to borrow or the way in which you borrow.
9 reasons to get a personal loan
While it’s always important to carefully consider your financial situation before taking on a loan, sometimes a personal loan is the best way to finance a large purchase or project that you can’t afford upfront. Here are the top nine reasons to get a personal loan.
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 best advantages of using a personal loan to pay off your credit cards is the lower interest rates. With lower rates, you can reduce the amount of interest you pay and the amount of time it takes to pay off the debt.
Best for: Those with lots of high-interest debt.
Takeaway: Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single payment with a lower interest rate.
2. Alternative to payday loan
If you need money for an emergency, using a personal loan instead of a payday loan may save you hundreds of dollars in interest charges. According to the Federal Reserve Bank of St. Louis, the average APR for a payday loan is 391 percent, while the maximum interest rate on a personal loan is typically 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 have longer term lengths and will generally cost the borrower much less in total interest.
Best for: Borrowers with bad credit looking to avoid high-interest predatory loans.
Takeaway: Personal loans are cheaper and safer than payday loans.
3. Home remodeling
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 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.
Best for: Those looking to finance a small to mid-sized home improvement project or upgrade.
Takeaway: A personal loan can help you fund a home improvement project if you don’t have equity in your home and don’t want to borrow a secured loan.
4. Moving costs
The average cost of a local move is $1,250, while a long-distance move costs $4,890. 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.
Best for: A long-distance move or those anticipating thousands of dollars in expenses.
Takeaway: 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
If you have a sudden emergency, like paying for a loved one’s funeral, using a personal loan could be a low-cost option. The median cost of a funeral is $7,640, which can be difficult for many families to afford.
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 a personal loan to cover unexpected medical costs.
Best for: Those in need of unexpected or emergency funds.
Takeaway: Because they can be disbursed so quickly, personal loans are a good way to cover an emergency or unexpected expense.
6. Large purchases
If you suddenly need to buy a new washer and dryer or replace the transmission in your vehicle but don’t have the funds on hand, a personal loan can provide relief.
Personal loans allow you to cover steep automotive repairs or purchase major household appliances and electronics immediately, especially if you need your car or those appliances for regular use. Though you’ll have to pay interest and potentially upfront fees, a personal loan can save you time and money in the long run, since you’ll be able to avoid using laundromats or rental cars and other short-term, expensive alternatives.
Best for: Those looking to make a bigger household purchase now to save time and money in
Takeaway: 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, RV or even private jet. 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.
Best for: People looking to purchase a new vehicle and those who don’t want to use the vehicle as collateral through an auto loan.
Takeaway: Using a personal loan is better than depleting your savings or emergency funds when paying for larger expenses.
8. Wedding expenses
The average cost of a wedding in 2021 was $28,000. For couples who don’t have that kind of cash, 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.
Best for: Those looking to finance wedding expenses.
Takeaway: 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 what about a honeymoon or a luxury cruise? Whether you’ve just graduated or you’re celebrating an anniversary, personal loans can help you finance your dream vacation. But keep in mind you’ll pay interest on that loan long after your vacation is over.
Best for: Those paying for a lavish or larger vacation.
Takeaway: 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, says Lauren Anastasio, CFP at SoFi.
- You can qualify for better financing options. A personal loan also may not make sense if the loan is used for a purchase that would qualify for a better loan type, says Anastasio. “This would be applicable to real estate, automobiles and education. Mortgages, car loans and student loans are all designed specifically to fund a particular expense and each come with features and benefits that personal loans do not offer.” Consider the reason why you’re applying for a personal loan and if you’d be better off with a loan designed specifically for that purpose.
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.
Alternatives to personal loans
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. They include:
- Credit cards: 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 home equity line of credit (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.
- 401k loan: 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.
How to get a personal loan
If you want a personal loan, you should compare multiple lenders to find the lowest interest rate. Start with your current bank and then apply with online lenders, local credit unions and other banks. Most lenders will allow you to get prequalified, letting you see your potential interest rates and terms before you apply, all without a hard inquiry on your credit report. Along with interest rates, you should also compare loan terms and fees.
Once you find a lender you like, you’ll submit a complete application with your loan details, personal information and income verification documents. This will result in a hard inquiry on your credit report. For most lenders, this part of the process is quick; as long as you submit all relevant documents, you may be able to get your funds in a matter of days.
The bottom line
At the end of the day, a personal loan can be used for almost anything — that’s why it’s categorized as “personal”.
Remember that no matter the circumstance, the loan must be paid back eventually. When you take out a personal loan to pay off credit cards or to throw the perfect wedding, you are borrowing money that must be repaid with interest on top. Personal loans are a great way to consolidate debt and make major purchases, but you should always utilize this financial resource responsibly.