The top 9 reasons for personal loans

If you need cash, a personal loan may be a good option. Personal loans are borrowed money that can be used for large purchases, debt consolidation, emergency expenses and much more.

Personal loans can be a helpful tool for getting the cash you need in some situations, but not all. Here are a few of the scenarios in which you may want to consider taking out a personal loan.

9 reasons to get a personal loan

While it’s always important to carefully consider your financial situation and creditworthiness 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.

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.

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. 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 33 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.

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.

4. Moving costs

The average cost of a local move is between $912 and $2,532, 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.

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 a personal 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.

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.

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.

8. Wedding expenses

The average cost of a wedding in 2022 was $30,000, according to The Knot. 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.

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.

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.

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.

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.

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.