10 Common Uses for a Personal Loan
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Whether your personal loan is unsecured or backed by collateral, it’s a source of funding that can be used to pay for virtually anything, from debt consolidation to home improvements. With personal loans, the lender gives you a lump sum of money that you repay with interest in fixed installments, typically over 12 to 60 months.
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 credit cards with variable rates. Refinancing credit card debt with a personal loan can save you money with potentially lower fixed APRs and a set repayment schedule. (The annual percentage rate, or APR, is a more accurate measure of your borrowing costs, as it includes the interest rate plus fees.)
Be aware that many personal loan lenders charge an origination fee, which can range from 1% to 8% of the loan amount. This amount can either be deducted before funds are disbursed or added on top of your balance.
Alternatively, prime borrowers with good-to-excellent credit scores might also consider consolidating credit card debt using a balance transfer credit card with a 0% introductory APR period. During the introductory period, which can last as many as 20 months, you would avoid paying interest. If your balance isn’t repaid when this period ends, however, you’ll be charged interest on the remaining balance. You can also typically expect to pay a 3% to 5% balance transfer fee when transferring debt from your old credit card to a new one.
2. Consolidating multiple types of debt
Personal loans can be used to consolidate multiple types of debt into one fixed monthly payment. Consolidation is simple, too: You’ll take out a new loan and use the funds to pay off your old debts. From there, you’ll make payments on your new loan.
Consolidation 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 could 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 loan origination fees can offset savings. 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 is that you don’t need to back the loan with collateral. A home equity loan or home equity line of credit (HELOC) requires your home to be used as collateral; if you default on the loan, you’ll lose your home to the bank.
However, the cost of borrowing is typically higher with personal loans than it is for home equity loans and 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 for it 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 don’t have money saved up, then a personal loan could help you make ends meet. Just be sure you can afford the monthly payments on a loan before committing to one.
5. Buying a car or refinancing an auto loan
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 unsecured personal loans. The downside of 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.
If you’re looking to refinance your existing auto loan for better terms, then a personal loan might be a good option, depending on your credit. 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 could 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 medical loan to pay for such costs. However, 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’ll be able to negotiate down your bills or enroll in 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
Most lenders don’t offer personal loans for business expenses — and, in general, they may not be a good idea. When you take out a personal loan, you’re putting your personal credit on the line. Should your business go under, you risk damaging your personal credit score if you can’t repay the debt.
Personal loans also come with lower borrowing 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. However, some new business owners might struggle to meet the robust requirements business loan lenders expect, and thus might turn to a personal loan to get the funds they need to get off the ground.
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. And 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 cost of the already-pricey 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 event 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 also be expensive, especially if you have a lot of bulky furniture or you’re moving a long distance. You can use a personal loan (also known as a moving loan) for a variety of moving expenses, from renting a truck to hiring a 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 generally 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 funeral loan — which is just a personal loan — could fill the gap.
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 and need money fast.