Personal loans are an excellent tool to help cover an unexpected expense or help you take a dream vacation. They can also be used to pay down debt or fund a home improvement project.
If you’re looking to cover an upcoming expense fast and don’t have the money on hand, odds are, a personal loan can help. Lenders place very few limitations on how you can use personal loan funds — common restrictions are on paying for higher education or funding a business.
Here are six common ways you can use a personal loan.
- 1. Debt and credit card consolidation
- 2. Medical bills
- 3. Home improvement projects
- 4. Major life events
- 5. Financing a vehicle
- 6. Unexpected purchases
- How do personal loans work?
- What you can’t use personal loans for
- Personal line of credit vs. a personal loan
- Find the best lender for your needs
1. Debt and credit card consolidation
A debt consolidation loan combines several debt accounts you have into one loan with a single monthly payment. With a debt consolidation loan, you can get one interest rate on your loan instead of each debt having its own separate interest rate. Lenders, credit unions, and banks all offer debt consolidation options.
2. Unexpected medical bills
If you have to make an unexpected doctor’s visit or need a procedure, you may not have enough cash or savings on hand to pay the medical bill.
To avoid having the bill go to collections, you could use a personal loan to pay off medical bills in one lump sum payment. However, realize that this may not be the best option if you haven’t tried to work out a reasonable payment plan with your medical provider first.
Medical bills typically don’t charge interest so you could save money and avoid loan fees by working out a payment plan instead.
3. Home improvement projects
If you’re considering renovating your property, or need to cover a sudden repair, a so-called home improvement loan can be helpful. This way, you don’t have to worry about coming up with the money, especially in an emergency, such as a broken heating, ventilation, and air conditioning system.
A personal loan can also help you pay for materials, contractors, and other unexpected costs that could come up during a remodel.
If you have equity in your home, you may want to consider looking into a home equity loan or home equity line of credit (HELOC) and compare the cost with a personal loan to see which option fits your needs. However, keep in mind that your home is used as collateral with HELOCS and home equity loans. If you can’t make your payments, you could lose your home.
4. Major life events
Planning a wedding or looking to grow your family through adoption? These are life-altering events that can easily cost thousands of dollars. A personal loan could be a great option to obtain the money you need and pay fixed monthly installment payments over time.
Personal loan monthly payments are predictable and allow you to fit the cost into your monthly budget. You can also borrow as little or as much as you need for the major life event, such as covering funeral expenses.
Sometimes, a personal loan can be a better option than a credit card to help you pay for a vacation or have some spending money when traveling. However, it’s of course better to plan, save, and budget for expenses (like vacations) that don’t come out of nowhere.
5. Financing a vehicle
If you’re looking to purchase a vehicle, you can use an unsecured personal loan, which doesn’t use your car as collateral like an auto loan. However, depending on your credit, interest on an auto loan may be less overall in comparison with total interest for a personal loan.
You can also get a personal loan to fund a boat or an RV purchase. However, boats and RVs typically have higher loan amounts, so for this reason you might want to consider taking out a loan specific to your purchase, such as an RV or boat loan.
6. Unexpected purchases
If you don’t have the funds to cover an unexpected large purchase (such as a new appliance), a personal loan can get you the money you need when you need it. You can also use the money for vehicle repairs or a new computer.
How do personal loans work?
Personal loans are closed-end loans which means the lender funds your total amount upfront. You can borrow anywhere from a few hundred to several thousand through an unsecured personal loan.
Instead of putting up collateral to obtain the loan, unsecured loans don’t require collateral and instead factor in your credit, income, and other financial information. (A secured personal loan could be an option if you don’t qualify for an unsecured loan and don’t have access to a cosigner.)
Qualifying for a loan will depend heavily on the lender’s requirements and your current financial situation. Additionally, how much you need to borrow and the type of lender you select will depend heavily on your intended use for the personal loan.
What can personal loans not be used for?
Personal loans can’t be used for everything. Here are some examples:
- Funding a business: Most lenders don’t offer the option to fund a new business, whether that’s to help buy inventory, materials, pay for licenses, and so on. However, some lenders, like Discover do offer this option. It’s best to explore other options first though, such as business grants or an SBA loan offered through the Small Business Administration.
- Paying for higher education: You’re unlikely to find a personal loan lender who will cover the costs of college and most don’t allow it. Your best bet is to turn to federal loans and private loans to fund your education. It’s recommended to complete the FAFSA and consider federal student loans before taking out a private student loan.
- Buying a home: A personal loan can’t cover the high cost of buying a home, and most lenders won’t allow you to use one even for a small down payment. You might want to consider a first-time homebuyer program, which offers down payment assistance and other government loan programs.
| Note: It should be mentioned that personal loans can’t be used for illegal activity, such as gambling. |
Personal line of credit vs. a personal loan
A line of credit is similar to a credit card, where you can take out the funds you need and only pay back what you borrow. It’s a form of revolving credit with a set borrowing limit and a draw period, which is the time you can take out the money you need. Once the draw period closes, you no longer have access to those funds.
With a personal loan, you get a lump sum of money upfront, and are required to pay that amount in monthly installments. A personal loan is best for debt consolidation or one-time expenses, whereas a personal line of credit is a good option for those who have ongoing expenses (such as a home renovation) or medical expenses.
However, lines of credit generally have higher variable interest rates, which means you’ll pay more on interest over the life of the credit line. A personal loan gives you a fixed interest rate and payment, meaning you’ll know what you’re paying each month and when you’ll pay off the loan.
Take stock of your situation to determine if a personal loan or personal line of credit is best for you.
| Personal loan | Personal line of credit | |
|---|---|---|
| How it works | Installment loan with monthly payments | Works like a credit card where you borrow as needed |
| Interest rate type | Fixed (5.40%-35.99% APR) | Variable |
| Loan amounts | Up to $100,000 | Up to $50,000 |
| Terms | 1-7 years depending on lender | Ongoing until the draw period ends |
| Disbursement | One lump sum | Access until draw period closes |
How do you find the best personal loan lender?
It’s important to shop around to find the best deals and offers. Get clear on which personal loan terms are important to you. Then, you’ll want to compare interest rates, fees, repayment terms and more.
Also, read the fine print before agreeing to any loan terms to make sure you understand what your financial responsibility is and agree with all the terms. A personal loan can be a very versatile tool to help you cover an array of expenses and possibly even build your credit if you commit to making on-time payments during your repayment term.
Use a personal loan calculator to determine your monthly payment and how much total interest your loan will cost you based on your interest rate.