10 Common Uses for a Personal Loan
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Unsecured personal loans don’t require collateral and can be used to pay for virtually anything, from home renovations to debt consolidation. When you take out a personal loan, the lender gives you a lump sum of money to be repaid with interest in fixed monthly payments over a set period of time, typically 12 to 60 months. Here are some common personal loan purposes.
- Refinancing credit card debt
- Consolidating multiple types of debt
- Financing home improvements
- Making a large purchase
- Financing or refinancing a car
- Paying off medical bills
- Covering business expenses
- Financing your wedding
- Paying for moving expenses
- Paying for a funeral
1. Refinancing credit card debt
High-interest credit card debt can place a burden on your finances and make it difficult to reach your financial goals. When you carry a revolving credit card balance, you’re paying compounding interest on purchases you’ve already made, which is an expensive way to borrow money.
Personal loans offer fixed monthly payments, which can make them easier to keep track of than inconsistent credit card statements. Consolidating credit card debt with a personal loan may save you money with potentially lower APRs, faster repayment or lower monthly payments. Be aware that some personal loans carry origination fees, which can range from 1% to 8% of the loan.
Alternatively, prime borrowers with good-to-excellent credit scores might also consider consolidating credit card debt into a balance transfer credit card with a promotional 0% APR period. During this period, you would avoid paying interest during a set amount of time, typically up to 20 months. Keep in mind that you may have to pay a balance transfer fee (typically 3% to 5% of the balance) as well as other fees and interest charges if the debt isn’t paid in full during the promotional period.
2. Consolidating multiple types of debt
Personal loans can be used to consolidate multiple types of debt into one fixed monthly payment. This can make it easier to keep track of your bills and pay off debt on a set schedule. The largest benefit of debt consolidation is potential cost savings: A personal loan may offer you lower APRs than other debt types, which would mean more of your payments go toward your principal balance instead of fees.
Keep in mind that some of your current debts may have a lower APR than a personal loan may offer. Personal loan APRs can hit triple digits depending on the lender and your credit. Plus, personal loans can come with origination fees, which may also offset any money saved. It’s important to work out the numbers using a debt consolidation calculator to see if you can save money by consolidating debt with a personal loan.
3. Financing home improvements
Home renovations can add value to your home and make it a better place to live. There are a number of ways to finance home improvement projects, including personal loans and home equity loans.
The primary benefit of renovating your home with an unsecured personal loan compared with using home equity is that you don’t have to put up your home as collateral. This means that if you default on the loan, you don’t risk losing your home to the bank.
However, the cost of borrowing is typically higher with personal loans than it is for home equity loans and home equity lines of credit (HELOCs). Unsecured personal loan APRs tend to be higher than secured home equity loan APRs, which means you’d pay more money for your renovations over the life of the loan.
4. Making a large purchase
Since personal loans can be used to pay for virtually anything, some consumers use them to make large purchases. The best way to pay for a large miscellaneous purchase is to budget up and pay in cash, but that’s not always possible in an emergency – like when an appliance suddenly breaks down.
If you need to buy something immediately and you don’t have money saved up, then a personal loan could help you make ends meet.
5. Financing or refinancing a car
While it’s possible to use a personal loan to pay for a car, they don’t have as many upsides when compared with auto loans. Auto loans tend to have lower APRs and are easier to qualify for than personal loans. The only downside to auto loans is that they require you to put up your car as collateral, which means that your car could be repossessed if you default on the loan. When you use a personal loan for your car purchase, you don’t run the risk of losing your car.
If you’re looking to refinance your existing auto loan for better terms, then a personal loan might be a good option. Prime borrowers with good-to-excellent credit who can qualify for a lower APR on a personal loan than what they have on their current auto loan would save money over the life of the loan and can potentially pay off debt sooner. However, most borrowers will not qualify for a lower APR on a personal loan than an auto loan.
6. Paying off medical bills
Medical bills can come up suddenly, piling up and becoming difficult to repay. You can use a personal loan to pay for medical expenses, but you should explore your other options first.
Medical billing offices are used to working with consumers to help them afford the cost of health care. Often, you will be able to negotiate down your medical bills or create a no-interest payment plan with the medical provider. There are also medical credit cards with special financing that allow you to repay medical bills with no interest within a certain timeframe – just watch out for costs like deferred interest.
7. Covering business expenses
Small business loans come with lots of requirements. Most lenders prefer to work with businesses that have:
- A business credit score, which takes time to build up
- At least 6 months to a year in business
- A business plan
- A balance sheet
- Cash flow history and projections
- Accounts receivable and accounts payable reports
- Collateral, in some cases
Entrepreneurs who are just deciding to open a small business may not have the materials required by many business lenders. In this case, they might consider turning to a personal loan instead.
While personal loans for business come with less strings attached, they also come with a few downsides. The biggest is that you’re putting your personal credit on the line. If your business goes under, then you risk ruining your personal credit score if you can’t repay the loan. Plus, personal loans come with lower limits and higher APRs than business loans, which means you’ll be paying more money over the life of the loan, and you may not get enough money to cover business expenses in the first place.
8. Financing your wedding
Over the course of the wedding planning process, couples can expect to cut big checks to a variety of vendors, from florists and caterers to event venues and limousine drivers. Weddings cost tens of thousands of dollars, but they don’t have a mainstream financing option. So, many couples turn to personal loans to cover wedding expenses to break the cost of a wedding into manageable monthly payments.
The biggest downside to taking out a wedding loan is that you’ll end up paying interest on top of the already-pricey wedding vendors. The cost of borrowing money isn’t really justified, since weddings are a luxury expense. It’s better to save up during the engagement and pay for the wedding in cash to avoid unnecessary interest charges. If you can’t afford to pay in cash, opt for a smaller and less expensive wedding instead.
9. Paying for moving expenses
Moving is labor-intensive and time consuming; on top of that, it can be expensive, especially if you have a lot of bulky furniture or you’re moving a long distance. You can use a personal loan for a variety of moving expenses, from renting a truck to hiring a moving service to do the heavy lifting for you.
While moving can be expensive, it shouldn’t cost enough to justify seeking a personal loan. Moving isn’t a last-minute decision, so ideally you could budget and save in the months leading up to your move. You could also consider selling old furniture or borrowing from friends and family.
10. Paying for a funeral
Between funeral home fees, a cemetery plot and a casket, funerals cost thousands of dollars at a bare minimum. Not everyone is prepared at the time of their death to cover these final expenses. If a loved one died without life insurance or sufficient assets to cover the cost of a funeral, then a personal loan can fill the gaps.
Although it’s not ideal to have to borrow money for a funeral since you’ll have to pay interest on the expenses, it may be the best option for families who don’t have another way to pay.