Personal loans are flexible. 🤸🏿♂️ They can be used to pay for just about anything.
Technically, you could get a personal loan and go on a self-care spending spree or invest it in the latest trendy stock – but we’ve got a couple of better ideas.
Personal loans are best used to pay for emergency expenses, pay down other debts and other strategic money moves.
Let’s take a quick look at what makes personal loans so versatile, then we’ll dive into the variety of ways you can use a personal loan.
Why Get a Personal Loan?
Personal loans are designed to make borrowing the money you need simple.
They’re a versatile money tool that offers:
- Quick access to money you need: In most cases, loan approvals happen fast. You can get the money deposited into your checking account in under a week – and sometimes even the next business day.
- Budget consistency: Because a personal loan is a fixed-rate installment loan and you borrow one lump sum of money upfront, your monthly payments will stay the same over the life of the loan.
- Flexible repayment terms: Depending on the type of loan and what the lender offers, you could have anywhere from 24 – 84 months (or 2 – 7 years) to pay back the loan. Check with your lender first and make sure there are no prepayment penalty fees if you decide to pay your loan off early.
What do we mean when we say ‘personal loan’?
There are two main types of loans: unsecured loans and secured loans. We’re focusing on unsecured personal loans – they’re the ones you’ll usually see advertised as personal loans.
- Unsecured loans are the most accessible types of loans because they don’t require collateral (hint: cars, boats, homes, etc.). Which means a lender can’t take possession of your property if you can’t pay back the loan.
- Secured loans require the borrower to put collateral on the line to get a higher loan amount and/or a lower interest rate. If you don’t repay the loan, the collateral you put down gets taken by the lender.
|Unsecured Personal Loans at a Glance|
|Loan Limits||This differs by the lender. The max amount usually won’t be more than $50,000 (up to $100,000 is possible).|
|Credit Score||Typically, a borrower needs a credit score in the mid-to-high 600s to get an interest rate that’s noticeably better than a credit card’s standard rate (your overall credit history will also be considered).|
|Repayment Terms||Repayment terms range from 24 – 84 months (2 – 7 years).|
What Are Personal Loans Used For?
Because personal loans can be a simple way to access thousands of dollars 💵, they’re often used for reasons that go beyond everyday purchases.
Here are nine common reasons why people use personal loans:
1. Credit card payoff
Personal loans are commonly used to pay off higher-interest debts, especially credit card debt. In 2021, the average credit card interest rate was over 6% higher than the average personal loan interest rate.
You might find it a lot easier to chip away at your credit card balance faster if you use the money from a lower interest rate loan to pay off your higher-interest credit card. (Or at least pay off as much of it as you can based on the size of the loan you get).
Here are some important things to consider before using a loan to pay off a credit card balance:
- Your credit score will impact what interest rate you get. If your score is low, it may not be worth it to pay off your card with a personal loan.
- Even if you’re paying a lower interest rate on a personal loan, there’s a chance that your fixed monthly payments will be higher than your current credit card minimum payments. (This strategy might save you money over the long term, but be ready to budget for a higher monthly bill.)
If you decide to pay off your credit cards using a personal loan, consider creating a revised monthly budget that helps you avoid taking on more debt.
2. Medical bills not covered by insurance
Medical bills – for you or a loved one’s care (including your pets 🐶🐍😺) – can be paid off with a personal loan that gives you a longer time to repay. This is especially helpful for:
- Large medical bills that must be paid in full by a due date
- Planned treatments that aren’t covered by your health insurance
- Non-medical expenses associated with your care (including things like traveling to treatment facilities, buying medication and hiring a babysitter)
Before applying for a personal loan, contact your health care providers to see if they can set you up with a low- or no-interest payment plan. Many providers do that. Their installment plans are often less expensive than a personal loan, depending on whether they charge interest (and how much they charge).
If you do start shopping for a personal loan to cover medical costs, it doesn’t have to be a specific “medical loan.” While many lenders advertise medical loans, many of the loans are regular personal loans. Your choice of loan should come down to getting the one with the best interest rate and repayment term for your needs.
3. Debt consolidation
If you have multiple debts, you can use a personal loan to pay off several of your debts at once, consolidating them into one, convenient loan (aka a “debt consolidation loan”).
Consolidating your debt with a personal loan could make tracking your debt easier while saving you money.
Debt consolidation is a good option for things like high-interest credit cards, medical bills or anything else that’s making your debt feel out of control – especially if you can get a loan with an interest rate that’s lower than the average rate on your current debts.
4. Car repairs
Last month, it was the power windows. This month, it’s the brakes. 😞 Even in the work-from-home age, many of us still need a car🚗, and it’s bound to need fixing at some point – the problem is that we never know when.
If you don’t have enough saved up to cover an expensive repair that’s not covered by your auto insurance, a personal loan could be your best bet.
On the other hand, a credit card might make sense when:
- You need your car repaired before you can take out a personal loan.
- It’s a small enough charge that you can easily pay it off in a month or two (giving the interest no time to accumulate).
If you do need to put an expensive repair on your credit card and it would take many months (or years) to pay off because of your card’s high interest rate, consider taking out a personal loan to help pay off what you’ve charged on your card.
5. Home remodeling projects
Many homeowners use personal loans to finance their home improvements. 🏠 Due to the high cost of most remodels, home improvements make the most financial sense when the remodel is expected to increase the value of the home. (It’s like spending money to make money).
For example, a homeowner might take out a personal loan to replace old windows with energy-efficient windows before listing their home for sale. Or maybe they need new kitchen appliances or a furnace that actually works.
Using a personal loan instead of a credit card in this situation will usually save you a lot of money.
But, if you have enough home equity (the value of your home minus what you still owe on it), there may be other, lower-interest home improvement loan options available to you at a lower interest rate.
6. Moving costs
The act of moving your life from point A to point B can be a major expense, especially if it’s a long-distance move. Whether it’s moving for work, family or medical reasons, you may find yourself hitting the road without enough advance notice to have saved up for the cost of moving.
A personal loan can help you make your move by:
- Paying for your belongings to be transported
- Helping you cover living expenses if you’re moving without a job prospect lined up
And there are some interest-free options.
If you’re moving for work, your new employer may be willing to provide relocation assistance.
And, if you’re a homeowner expecting to make a profit when you sell your house, another option is to use that sale money to help cover your moving expenses.
7. Growing your family
When it comes to love, it recognizes no barriers – not even financial ones. If you’re planning on getting married or having a child, you may be searching for ways to overcome some of the high costs associated with these life milestones.
Even the most cost-conscious plans can sometimes require more money than what you’ve budgeted. If you plan on being in a family way via adoption, it’s a process that often doesn’t give you much capacity to control costs. Expecting parents might consider taking out a personal loan to help cover living expenses during parental leave.
Here’s one of our sacred money tips: Avoid going into debt for anything you don’t need (or that won’t earn you a return on your investment). Buuut … we all could use a break every now and then, and a vacation can do wonders for the soul.
Personal loans can make those much-needed getaways happen.
Saving money for a vacation is always the best approach. But let’s face it, our budgets might not always allow us to save enough by the time we decide we just plain NEED to go somewhere.
If it comes down to charging your vacation costs on a high-interest credit card or paying for them with a lower-interest personal loan, it may make more sense to go with the loan. Pro tip: Review any rewards programs your credit card might offer before deciding on a loan.
9. End of life costs
Suddenly finding yourself responsible for a loved one’s funeral expenses can be a stressful experience on top of any emotional distress you may feel.
A personal loan can help you pay for a funeral, burial and other associated services.
If you’re considering a loan in this situation, you may want to ask your bank or credit union if they offer funeral loans (a personal loan specifically designed for this purpose). Funeral loans usually give you the option of having your lender pay the funeral service provider directly.
When Does It Make Sense To Get a Personal Loan?
Life can be long and financially complicated. No matter who you are or what your life looks like, there’s a good chance you’ll find yourself needing cash you haven’t saved up for. 🆘 In these types of situations, a personal loan can be a lifeline.
Personal loans can also be a useful tool for improving your financial situation overall, allowing you to swap out high-interest debt with a low-interest loan or by increasing the value of your home with a potentially wealth-generating remodel.
If you’re interested, we’ve got a deeper-dive guide to getting a personal loan that can help you decide if it’s the right money strategy for you.
The Short Version
- Personal loans can help you pay for large, unexpected (and expected) expenses in a manageable way
- You can use personal loans to help bring high-interest debt under control 🙏
- When you apply for a personal loan, lenders consider your overall financial situation, including your credit score and income
Federal Reserve System. “Consumer Credit – G.19.” Retrieved September 2021 from https://www.federalreserve.gov/releases/g19/current/default.htm