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What’s the Purpose of a Loan? 6 Good Reasons to Get a Personal Loan

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The list of common purposes for a personal loan include financing a large purchase, covering an emergency expense and consolidating debt. Personal loans, which are typically unsecured, are paid back in monthly installments with interest. Most lenders will look at your creditworthiness and other factors to determine your interest rate. You should always evaluate the purpose of a loan to determine whether you need to borrow and have the ability to make payments.

What’s the purpose of a loan? 6 reasons for personal loans

  1. Consolidate debt to pay off bills
  2. Cover unplanned emergency expenses
  3. Make necessary home repairs
  4. Finance funeral expenses
  5. Help cover moving costs
  6. Make a large purchase

1. Consolidate debt to pay off bills

Consolidating debt is one major reason to borrow a personal loan. This approach can make sense if you’re able to secure a low interest rate. If you pay your other debts with the money from a personal loan, you’ll only have one fixed monthly payment, and you might be able to save money on interest.

The average APR on a 24-month personal loan is 9.46% as of February 2021 — the latest data available from the Federal Reserve — while the average interest rate on all credit card accounts is 14.75%.

A personal loan for debt consolidation could also help you:

  • Extend your repayment term
  • Lower your monthly payments
  • Free up more of your income to cover necessary expenses

2. Cover unplanned emergency expenses

While it’s best to build an emergency fund to cover unexpected expenses, an emergency personal loan can help if you’re not yet prepared.

A 2019 LendingTree study on emergency savings found that only 48% of Americans could handle a $1,000 emergency cost using just their savings.

Some reasons for an emergency loan include:

  • Job loss or reduced hours
  • Auto repairs
  • Medical costs
  • Help for a friend or family member

3. Make necessary home repairs

While you might have a wish list of home updates, you might only consider a personal loan for emergency issues impacting your health and safety.

You might have an issue that requires immediate attention, such as:

  • Broken heating or air conditioning system
  • Blocked pipe
  • Gas leak

In these scenarios, a personal loan can help you pay for the repairs over time.

4. Finance funeral expenses

When someone dies without leaving behind sufficient funds for funeral costs, it can put a significant financial strain on the surviving family members.

The median cost of a funeral with a viewing and burial in 2019 was $7,640, according to the National Funeral Directors Association. Many won’t have enough saved to cover that cost all at once.

A funeral loan could be an idea if you’re struggling to cover the cost of a funeral. You may even be able to get a funeral loan with bad credit.

5. Help cover moving costs

Another idea on the list of loan purposes: covering moving costs. There are many scenarios in which moving loans may make sense:

  • You don’t feel safe in your current environment
  • You’re separating from your spouse
  • You need more space for a child on the way

A job offer in another location can be another good reason to move, but you should consider carefully whether your new income and cost of living will make it possible to repay your loan.

Moving loans for bad credit are possible, but they’d typically come with high interest rates. You’ll want to calculate whether your new income will cover the added moving expenses.

6. Make a large purchase

You can take out a personal loan to finance a large purchase, but that doesn’t mean you should borrow money to get a new entertainment system, patio set or car. Some large purchases are necessary, such as suddenly needing a new major appliance.

While you can use a personal loan to buy a car, auto loans are typically preferable, since they usually have lower interest rates and easier qualification requirements.

On the other hand, auto loans require collateral, which means you could lose your car if you fall behind on payments. It’s a good idea to compare rates, especially if you’re worried about risk.

4 reasons to choose a personal loan over another type of debt

  1. You’re looking for a loan that doesn’t require collateral
  2. You want a safer alternative to a payday loan
  3. High-interest credit cards would dig you deeper into debt
  4. Consolidating your debt would make repayment easier

1. You’re looking for a loan that doesn’t require collateral

One of the benefits of obtaining a personal loan is that they are generally unsecured, which means they aren’t backed by assets like your house or your car.

While secured loans typically come with lower interest rates, there is some risk involved:

  • If you default on a secured loan, you risk losing whatever collateral you used to back the loan
  • If you fall behind on auto loan payments, for example, you might face repossession of your vehicle

Since financial hardship can strike anytime, you might feel more secure with an unsecured loan.

Note: The cost of unsecured debt is generally higher because lenders have no fallback if you don’t pay. Meanwhile, APRs on auto loans and mortgages are often in the single digits. While it’s possible to get a personal loan with similarly low rates, the best offers are reserved for borrowers with excellent credit. Personal loan borrowers with credit scores of 720 and above receive an average APR of 10.73%, compared with 37.09% for borrowers with scores between 620 and 639.

2. You want a safer alternative to a payday loan

If you have poor credit, you may have considered borrowing a payday loan to cover a purchase. However, payday loans are problematic, even if they can be an easy way to access cash between paychecks.

You could be charged sky-high APRs up to 400%. Plus, more than 80% of all payday loans are rolled over or extended into another loan within 14 days, according to the Consumer Financial Protection Bureau.

A lower credit score won’t necessarily disqualify you for a personal loan, but you may have to look harder at your loan options. There are a number of lenders who offer personal loans for bad credit and will work with you despite your low score, including:

And your search would be worth the trouble — a personal loan will almost always have lower rates and fees than a payday loan, plus a longer repayment timeline.

3. High-interest credit cards would dig you deeper into debt

A personal loan may give you the chance to secure a lower interest rate and a more manageable monthly payment than what you owe on your credit cards.

As we noted above, the average interest rate for all credit card accounts is 14.75%, according to the Federal Reserve. But APRs on some card types — including travel rewards cards and airline credit cards — can exceed 24%, according to data from CompareCards. And if you fall behind on your payments, the credit card issuer may apply a penalty APR on current and future purchases.

If you have the ability to borrow a personal loan at a lower rate, consider it. In addition to a lower interest rate, you may be able to choose a term and monthly payment that better fits your current budget needs. That said, if you continue using your credit cards after taking out a personal loan, you may find yourself deeper in debt.

4. Consolidating your debt would make repayment easier

If you have debt across several credit cards with crushing interest rates, a personal loan is one way to consolidate that debt. Debt consolidation, which we discussed above, is the most common personal loan purpose, according to a February 2020 study on personal loans.

Here’s a recap on how it works:

  • Take out a personal loan and use the cash to pay off all your outstanding credit card bills (and other debts).
  • Make only a single monthly payment. Depending on your loan, that payment may be lower than all your other monthly bills combined.

Another benefit of obtaining a personal loan: Most have fixed interest rates and payments, so your bills are consistent and predictable, and won’t increase over the life of your loan.

Should I get a personal loan? 4 questions to ask

Before taking out a personal loan, ask yourself the following questions:

  1. Why do I need a loan? While it may be tempting to take out a loan to purchase holiday gifts for your family or upgrade your computer, personal loans should only be used for necessary expenses. Ask yourself whether you really need to borrow before applying for a personal loan.
  2. What is the cost of borrowing money? Add up the total cost of borrowing, including all associated interest rates and fees, before making your decision. Compare different types of loans to ensure you’re getting the lowest possible rate. For example, it’s possible a home equity loan would be less costly.
  3. Can I handle more debt? If you’re already struggling to keep up with your expenses and pay down your current debts, a personal loan might make matters worse, unless you’re using it to consolidate existing debts. If you feel like you’re already trapped in debt, consider looking for additional income sources or utilizing government assistance programs instead of borrowing.
  4. Can I afford the monthly payments? You should always consider your ability to repay your personal loan, which means calculating your monthly payment and factoring it into your budget. Use our personal loan calculator to estimate your monthly payment before committing to a loan.

While a personal loan can be a financial lifeboat for some situations, it’s not always the best choice. It’s important to note that there are also bad reasons to get a personal loan. Carefully consider all your options before signing any loan agreements.

Rebecca Safier contributed to this report.


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