Personal loans are borrowed money that can be used for major purchases, debt consolidation, emergency expenses, and more. These loans are repaid in monthly installments over a typical two to six-year period, but this may take longer depending on your circumstances and the care with which you make your payments.
Here are the top nine reasons for a personal loan and when they make sense:
Alternative to a payday loan.
Renovation of the house.
Purchase of household appliances.
This is how personal loans work
Once you have been approved for a personal loan, the money you receive will be transferred to your bank account in a lump sum. The transfer can take as little as 24 hours or several weeks depending on the lender. You need to start paying monthly once the loan is paid off.
Most personal loans have fixed rates, which means your payments will stay the same every month. Personal loans are also usually unsecured, which means that there is no collateral behind the loan. If you don’t qualify for an unsecured personal loan, you may need to use collateral like a savings account or a certificate of deposit to get approved. You can also ask a friend or family member to co-sign your personal loan to help you get it approved.
9 reasons for a personal loan
While it’s always important to take a close look at your financial situation before taking out a loan, sometimes a personal loan is the best way to finance a major purchase or project that you cannot afford in advance. Here are the top nine reasons for getting a personal loan.
1. Debt Consolidation
One of the most common reasons for taking out a personal loan is debt consolidation. When you apply for a loan and use it to pay off several other loans or credit cards, combine all of these outstanding amounts into one monthly payment. This grouping of debts makes it easier to set a schedule for repaying your balances without getting overwhelmed.
One of the best advantages of using a personal loan to pay off your credit cards is lower interest rates. Lower interest rates can reduce the amount of interest you have to pay and the time it takes to pay off the debt. Consolidation allows you to pay off your credit cards indefinitely with a clear end date in sight.
Who will benefit most: Those with multiple sources of high-interest debt.
Takeaway: Using a Personal Loan to Pay Down High Yield Debts, such as B. Credit card debt, allows you to combine multiple payments into one payment with a lower interest rate.
2. Alternative to payday loans
If you need cash for an emergency, a personal loan instead of a payday loan can save you hundreds in interest costs. According to the Federal Reserve Bank of St. Louis, the average APR on a payday loan is 391%, while the maximum interest rate on a personal loan is typically 36%.
Payday loans have short repayment periods, usually between two and four weeks. This fast turnaround time often makes it difficult for borrowers to repay the loan on time. Instead, borrowers usually have to renew the loan, which results in accrued interest being added to the principal. This increases the total interest amount.
Personal loans have longer terms and generally cost the borrower much less than the total interest.
Who Will Benefit Most: Borrowers with Less than Great Credit.
Takeaway: Personal loans are cheaper and safer than payday loans.
3. House renovation
Homeowners can use a personal loan to upgrade their home or make necessary repairs, such as building a home.
A personal loan is great for people who do not have equity in their home or who do not want a home line of credit or a home loan. Unlike home equity products, often with personal loans, you don’t have to use your home as collateral. That way, they’re less risky.
Who will benefit most: Those who want to finance a small to medium-sized renovation or modernization project.
Takeaway: A personal loan can help you finance a home improvement project when you don’t have equity in your home and don’t want to take out a secured loan.
4. Moving costs
According to Moving.com, the average cost to move locally is $ 1,250 while moving remotely is $ 4,890. If you don’t have that kind of money to spend, you may need to take out a personal loan to pay for moving expenses.
Personal loan funds can help you move your belongings from one location to another, buy new furniture for your new home, move your vehicle around the country, and cover additional expenses. Using a personal loan for moving expenses can also help you stay afloat if you are moving without a job. This way you can prevent your savings or your emergency fund from being robbed.
Who will benefit most: Those planning a long-distance move and planning to spend thousands of dollars.
Take Out: If you can’t pay all of the costs associated with a long-distance move right away, a personal loan can help cover those costs.
5. Emergency costs
If you have a sudden emergency, such as the funeral of a loved one, using a personal loan can be an inexpensive option. The average cost of a funeral is $ 7,640, which is difficult for many families to afford.
Surprising medical bills are another common reason for taking out a personal loan, especially if your doctor requests full payment. Common medical treatments that may require the use of a personal loan include dental care, cosmetic surgery, fertility treatments, and other procedures that can cost $ 5,000 or more. Additional costs such as medical travel, parking, medication, companion animals, and aftercare can also be effectively financed with a personal loan.
Who will benefit most: Those in need of unexpected or emergency funds.
Takeaway: Because they can be paid off so quickly, personal loans are a great way to cover an emergency or unforeseen expense.
6. Purchase of home appliances
Domestic disasters can occur unexpectedly. If you suddenly need to buy a new washer and dryer but don’t have the cash, a personal loan can help. Like an entertainment center or gaming computer, other large purchases can also cost more than you have in your checking or savings account.
Personal loans allow you to buy large appliances and electronics right away instead of waiting months to save. Although you may have to pay interest and possibly upfront fees, a personal loan can save you time and money in the long run by avoiding the use of laundromats and other short-term but expensive alternatives.
Who will benefit most: Those who want to make a major home purchase now to save time and money in the future.
On the go: A personal loan can help you get new home appliances as soon as you need them.
7. Vehicle financing
A personal loan is a way to cover the cost of a car, boat, RV, or even a private jet. It’s also a way to pay for a vehicle if you aren’t buying it directly from the company.
For example, if you buy a used car from another consumer, a personal loan allows you to buy the car without emptying your savings account.
Who benefits most: People who want to buy a new vehicle.
Bottom line: It is better to take out a personal loan than to use up your savings or emergency funds to pay off major expenses.
8. Wedding expenses
According to The Knot, the average cost of a wedding in 2019 was $ 28,000. A personal loan can help cover the costs now and pay them off later for couples who do not have this money.
A wedding loan can be used for important things like the venue and the bride’s dress and more modest expenses like flowers, photography, cake, and a wedding coordinator.
You can also pay for the engagement ring with a personal loan. Depending on the type of ring you get, engagement rings can easily cost several months of your paycheck. If you don’t want to empty your savings account, consider getting a personal loan to make your engagement and marriage the way you always dreamed it would be.
Who benefits most: Those who want to finance their wedding expenses.
On the go: A personal loan can help you finance all of your wedding expenses upfront, which saves you from reaching into your savings or emergency funds.
9. Vacation expenses
Your average vacation might not cost enough to apply for a personal loan, but what about a honeymoon or a luxury cruise? Whether you’ve just graduated from college and want to go on a trip or celebrate a birthday, a personal loan can help fund your dream vacation.
Who will benefit most: Those who pay for lavish or long vacations.
Take Out: If you can pay off your vacation for several years, a personal loan can help you reach your dream destination.
Do I have to take out a personal loan?
When you need a quick inflow of cash to pay off necessary expenses, a personal loan can be a great option. Personal loan interest rates tend to be lower than credit cards, especially if you have great credit.
Of course, you should always weigh the pros and cons. After all, taking out a personal loan means taking on debt and you must be ready to pay off that debt for a few years to come. If you don’t have the monthly budget for principal plus interest, check how much to borrow or how to borrow.
When Not To Use Personal Loan
While a personal loan is a useful tool for financing larger or unforeseen expenses, there are times when it may not be the best option. Before applying, consider your financial situation and the reason for taking out the loan. “Some of the people who would not benefit from a personal loan include anyone with fair or poor credit and potentially very high-interest rates,” said Lauren Anastasio, CFP at SoFi. The lower your credit rating, the higher your interest rate could be. If you have bad credit, look for bad credit loans that are aimed at borrowers whose credit scores are not entirely perfect.
A personal loan may also not make sense if the loan is used for a purchase that would qualify for a better type of loan, explains Anastasio. “It would apply to real estate, automobiles, and education. Mortgages, auto loans, and student loans are all specifically designed to fund a specific expense, and each has features and benefits that personal loans do not. Think about why you are applying for a personal loan and whether you are better off with a loan specially designed for it.
Finally, if you are on a tight monthly budget, then a personal loan may not make sense for you, says Anastasio. “Some may find that paying a personal loan would be more than their various minimum payment requirements combined.” This can potentially leave you with more debt and tight cash flow.
Why choose a personal loan over other types of loans?
Regardless of the purpose of your loan, you are likely to have several options. Funding comes through credit cards, home loans, and more. In many cases, however, personal loans are an ideal solution for consumers. Personal loans are often cheaper than credit cards, and funding is faster than home equity loans or HELOCs.
Since a personal loan usually does not involve any collateral, it is also a less risky form of financing than secured loans such as home equity products, so that your home, vehicle, or savings account are not immediately at risk in the event of a failure.
How to get a personal loan
If you want a personal loan, you need to compare multiple lenders to find the lowest interest rate. Start with your current bank, then apply to online lenders, local credit unions, and other banks. Most lenders allow you to pre-qualify so you can see your potential interest rates and terms before you apply without a thorough review of your credit report. In addition to the interest rates, you should also compare the terms and fees of the loans.
Once you find a lender you like, submit a full application with your loan details, personal details, and proof of income. This leads to a serious investigation of your credit report. For most lenders, this part of the process is quick; As long as you submit all relevant documents, you can potentially receive your money in a matter of days.