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 typically two to six years, but it can take longer depending on your circumstances and how diligent you are with making payments.
Here are the top nine reasons to get a personal loan and when they make sense:
- Debt consolidation.
- Alternative to a payday loan.
- Home remodeling.
- Moving costs.
- Emergency expenses.
- Appliance purchases.
- Vehicle financing.
- Wedding expenses.
- Vacation costs.
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 a 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.
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. Consolidation allows you to pay off credit cards in finite terms with a clear end date in sight.
Who this benefits most: Those with multiple sources 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 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 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.
Who this benefits most: Borrowers with less-than-stellar credit.
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. In that way, they are less risky.
Who this benefits most: 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
According to Moving.com, 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 for your new residence, 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.
Who this benefits most: Those embarking on a long-distance move and 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. Common medical treatments that may require the use of a personal loan include dental work, cosmetic surgery, fertility treatments and other procedures that can cost $5,000 or more. Ancillary expenses like medical travel, parking, medications, service animals and aftercare also can be effectively financed by a personal loan.
Who this benefits most: 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. Appliance purchases
Household disasters can strike unexpectedly. If you suddenly need to buy a new washer and dryer but don’t have the funds on hand, a personal loan can provide relief. Other large purchases, such as an entertainment center or gaming computers, can also end up costing more than what you have in your checking or savings account.
Personal loans allow you to purchase major household appliances and electronics immediately, rather than having to wait months to save up for them. 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 and other short-term but expensive alternatives.
Who this benefits most: Those looking to make a bigger household purchase now to save time and money in the future.
Takeaway: A personal loan can help you get new appliances as soon as you need them.
7. Vehicle financing
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.
Who this benefits most: People looking to purchase a new vehicle.
Takeaway: Using a personal loan is better than depleting your savings or emergency funds when paying for larger expenses.
8. Wedding expenses
According to The Knot, the average cost of a wedding in 2019 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.
You can also consider paying for the engagement ring with a personal loan. Depending on the kind of ring you’re getting, engagement rings can easily cost several months’ worth of your salary. 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.
Who this benefits most: Those looking to finance their 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 and want to go on a trip or you’re celebrating an anniversary, personal loans can help you finance your dream vacation.
Who this benefits most: 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.
Should I get a personal loan?
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.
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. Before applying, consider your financial situation and the reason for taking out the loan. “Individuals for whom a personal loan would not make sense would include anyone with fair or below credit who may be subject to a very high interest rate,” says Lauren Anastasio, CFP at SoFi. 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.
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.
Lastly, if you’re on a tight monthly budget, a personal loan may not make sense for you, says Anastasio. “Some may find that the payment on a personal loan would be higher than their various minimum payment requirements combined.” This can potentially leave you with more accumulating debt and a cash flow crunch.
Why choose a personal loan over other types of loans?
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 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 — even beyond the options listed here.
And though there are many different reasons to take out a personal loan, 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.
Original source: Bankrate