- What is a Personal Loan?
- How Personal Loans Work
- Pros and Cons of Personal Loans
- Top Reasons for a Personal Loan
- Debt Consolidation
- Payday Loans Alternative
- Large Purchases
- Covering Moving Costs
- Medical Bills
- Funeral Costs
- Wedding Expenses
- Vehicle Financing
- Home Repairs
- Emergency Expenses
- Business Expenses
- Adoption Expenses
- Federal and state taxes
- Divorce expenses
- When not to Get a Personal Loan
- How to Choose a Personal Loan
- What is the best reason to put when applying for a personal loan?
- Do you have to give a reason when applying for a personal loan?
- What does loan purpose mean?
- Can you use personal loan money for anything?
- Can I get a personal loan and not use it?
Top 14 Reasons to Get a Personal Loan
The money borrowed on a personal loan can be used for anything from making a big purchase to paying off debt or covering unexpected costs. To get the best personal loan options, you need to consider your credit history, interest payments, and more conditions. Personal loans work differently depending on the reason you take them and may not be beneficial in some instances.
Here, you will learn the 14 most common purposes for getting a personal loan and make an informed decision on borrowing money.
What is a Personal Loan?
A personal loan is a lump sum of cash borrowed for non-business purposes. Traditional banks, credit unions, online banks, and non-bank lenders all provide personal loans. Short-term personal loans often have repayment durations of a few months, whereas longer loans can be up to five or six years.
Personal loans have interest rates just like any other type of borrowing. The annual percentage rate (APR) you pay on a personal loan usually depends on a number of conditions, such as how much you borrowed, how long you have the loan, and how good your credit is. If your credit score is high, you may qualify for a lower interest rate on a personal loan.
There are secured and unsecured personal loans. A secured loan demands collateral, while an unsecured loan does not. If your credit is less than ideal and you might have high-interest debt, look into a personal loan with collateral. However, in case of non-payment, you risk losing your asset.
How Personal Loans Work
The way most personal loans function is by lending the borrower money that must be repaid later. The amount, interest rate, and length of a personal loan are all negotiable.
Personal loans are popular because they can be obtained quickly and sometimes at lower interest rates than other loan options like online payday loans or credit cards. One can obtain a personal loan through a financial institution like a bank or credit union or from a private lender. You should check interest rates from many lenders before deciding on one to work with.
Personal loans require applicants to verify their identities, provide regular income, and give lenders permission to check their credit. In most cases, you should expect to hear back from your lender within a few business days.
The normal repayment period for a personal unsecured loan range from a few months to a few years. You will have to pay back your loan once you borrow money, normally in equal installments through monthly loan payments. Still, some personal loan options require you to return the borrowed money as a single monthly payment.
Pros and Cons of Personal Loans
Pros
- Personal loans are good for emergencies because they are approved and paid swiftly. You can cover emergency expenses in two days and return the borrowed sum in several monthly installments.
- Unsecured personal loans are collateral-free. You do not have to pledge your car, property, or another asset to repay the loan.
- Credit cards have higher rates than personal loans. The average interest rate on a personal loan was 10.28%, and the average credit card rate was 19.04% in November 2022.
- Personal loans typically last 2–10 years, unlike high-interest payday loans. Most of them have fixed interest rates, so the cost of your personal loan will not rise over time.
- Personal loans with lower interest rates than credit cards simplify monthly payments. High-interest credit cards may hurt your financial situation, and you will fall into credit card debt.
Cons
- Personal borrowing rates can be high. Poor credit borrowers may incur higher interest rates than credit cards or collateral-secured loans.
- Personal loans have stricter criteria. The lender checks the borrower's credit report, income, and DTI to decide if the borrower is creditworthy enough to get a personal loan.
- Fees and penalties may increase the cost of personal loans. Some loans have 1%–6% origination costs.
- Personal loans require monthly payments. If you do not account for a personal loan when you take it out and make monthly payments that overdraw your account, it can cause budget problems.
- Credit cards have low monthly payments and no deadline for paying off the balance. Personal loans have higher set monthly payments and must be paid off by the end of the loan term.
- You risk defaulting if you consolidate credit card debt into a personal loan due to increased payments and a longer payoff period.
Top Reasons for a Personal Loan
Debt Consolidation
One of the most typical uses of a personal loan is to pay off existing debts. If you take out a loan with the intention of using the proceeds to settle various existing debts, such as credit card bills, then you will be making only one single payment each month. By keeping debts together in this way, you may more easily determine how long it will take to pay off your obligations without being overwhelmed. Personal loans have lower interest rates than credit cards, making them a great option for paying off debt. If your interest rate was lower, you could pay off your loan faster and save money on interest.
Payday Loans Alternative
Instead of taking out a payday loan when you really need money, consider getting a personal loan. The maximum interest rate on a personal loan is normally around 36%, and the average APR for a payday loan is 391%. Payday loans are short-term loans to be repaid within two to four weeks, typically by the borrower's next payday. This rapid turnaround time makes it challenging for borrowers to make timely loan repayments. Instead of paying off the loan, borrowers are typically forced to refinance, which results in the interest being compounded. This will result in a higher overall interest charge. Longer repayment periods for personal loans typically result in lower overall interest costs.
Large Purchases
A personal loan is useful if you need to make a large purchase, like a new set of appliances or car parts, but do not have the cash on hand. If you need money quickly to pay for expensive car repairs or buy new large household equipment and devices, a personal loan can help. Even while you will have to pay interest and possibly some up-front fees on a personal loan, in the long run, you will save money and time by not having to resort to expensive short-term solutions like laundromats or rental cars.
Covering Moving Costs
A local move will cost around $1,250, while a cross-country move will set you back around $4,890. A personal loan could be necessary if you do not have that type of money lying around to cover your moving costs. With the money from a personal loan, you can buy new furniture, ship your car across the nation, and pay for any other moving-related or unexpected costs that may arise. If you are relocating without a job, a personal loan to cover moving expenses can be a lifesaver. You can spare your savings or rainy-day reserve this way.
Medical Bills
Even a very small medical emergency could result in a large expense for those without health insurance. When you are uninsured or underinsured, you can use a personal loan to cover a wide range of medical costs, such as those associated with visits to the emergency room or urgent care, orthodontic services and dental surgery, eye surgery, cosmetic procedures, bariatric surgery, and transportation costs. Pet medical bills might also be covered by a personal loan. For instance, if your dog swallowed their favorite chew toy and needs immediate surgery, you may use a loan to cover the cost of the procedure.
Funeral Costs
Unless a person has made funeral preparations in advance and saved the money, it usually falls on close relatives and friends to pay for the service. In 2019, the median cost of a funeral service, including viewing and burial, was $7,640, according to the National Funeral Directors Association. To say nothing of flowers, a tombstone, or a vault, which many cemeteries require.
Wedding Expenses
Having a solid wedding budget is crucial for keeping expenditures under control when planning such a significant life event as a wedding. Even while Zola reports that the average wedding costs between $10,000 and $20,000, large weddings can easily exceed that amount. If you need money for your wedding, a personal loan can help you get the dress, the ring, the flowers, the photographer, the food, and everything else you'll need. Also, if you would rather utilize your money for your honeymoon, personal loans are another option to consider.
Vehicle Financing
If you need a loan to buy or lease a car, you can get an auto loan, but if you need money for something else, you can get a personal loan instead. Auto loans are secured loans that use your car as collateral. While interest rates may be lower for car loans than those for unsecured personal loans, the collateral is still your car. A personal loan could help you avoid having your car repossessed in the event of late payments. You will finance the car purchase and use the car while paying the loan back.
Home Repairs
Homeowners can get a loan against their home's equity to perform necessary repairs or renovations. You may, however, apply for a personal loan. Home improvement projects are perfect for home equity loans or lines of credit, but these loans and lines of credit require you to put up your house as collateral. You should also be aware that some banks have tightened their HELOC lending restrictions as a result of Covid-19. A personal loan is a suitable alternative to taking out a second mortgage on your house if you fall behind on your payments. In addition, a private loan could be processed faster than a home equity loan.
Emergency Expenses
The purpose of an emergency fund is to provide a source of quick, easy access to funds in the event of a sudden, unforeseen financial setback. In case of a job loss or a medical emergency that requires you to take time away from work, you can utilize the money in your emergency fund to continue paying your bills and keeping the lights on. That, however, presupposes you have a healthy cushion for unexpected expenses. The Federal Reserve estimates that 36% of U.S. adults would be unable to cover a $400 emergency out of pocket. If you are still accumulating an emergency fund, a personal loan can help you with unanticipated expenses while you save up.
Business Expenses
You can achieve financial freedom and freedom from your 9-to-5 by starting your own business. If you need money to pay for start-up costs or to make ends meet before your business takes off, a personal loan could be a good option. Loans are available for new businesses, but the majority of lenders have requirements that your company be one to two years old and bring in $50,000 to $100,000 per year in revenue before you can even apply. If you have not been in business for very long or are not making a lot of money yet, you might have an easier time getting a personal loan.
Adoption Expenses
IVF and adoption both provide a way to become a parent, but they come with significant financial commitments. If you want to get pregnant through invitro, you should expect to pay anywhere from $40,000 to $60,000, as reported by FertilityIQ. Meanwhile, the average private agency adoption in the United States costs over $70,000, as reported by American Adoptions. In order to fulfill your desire to start a family, a personal loan might be of great assistance. The personal loan funds can be used for any adoption or invitro fertilization-related expenses, such as legal fees and travel.
Federal and state taxes
After submitting your tax return, if you discover that you owe money, you must pay that tax bill in full by the due date to avoid interest and penalties. Defaulting on your tax payments can have serious consequences, including liens on your property and reductions to whatever refunds you may be due. If you owe money to the Internal Revenue Service or your state tax agency, you might take out a personal loan to pay it off.
Divorce expenses
Divorce can cost as much as starting a new life together, and perhaps more if you and your soon-to-be ex are at odds. Let's say your divorce lawyer has cautioned you against utilizing any joint funds or credit cards until the divorce is completed. A personal loan could be an option in the meanwhile.
When not to Get a Personal Loan
Personal loans are good for covering high or unexpected costs, but they are not always the best choice.
- You cannot make the loan installments every month. The amount you can afford to pay each month toward a loan is based on your budget. A personal loan may not be the best choice if you have a limited monthly budget.
- You have a fairly poor credit score. An increased interest rate may be in store for those with low credit scores. Look around for bad credit loans that are designed for people with less-than-perfect credit.
- It is possible to upgrade your funding options. Personal loans are not suitable for buying homes and may not be an advantage for students. For homes, there are mortgage loans, and students may better try dedicated student loans backed by the government.
- Think about why you want to get a personal loan and choose the option according to the purpose and finances. Avoid risking your long-term financial security by using personal for anything other than an emergency.
How to Choose a Personal Loan
To get a suitable personal loan offer, shop around for the interest rate. Your first stop should be your bank, but do not rule out online lenders, credit unions, and other banks.
Many lenders allow you to pre-qualify. This procedure does not hurt your credit report, and most lenders will show you your estimated interest rates and terms in advance.
Apart from interest rates, make sure you have suitable loan terms and can afford to pay a fixed monthly payment. Pay attention to the fees, as your loan may become costly if there are high origination, late payment, or prepayment charges.
When you have settled on a potential lender, you will fill out an application form. It requires information on your loan, personal and bank account details, and proof of income. The approval procedure will cause a hard inquiry. This time, your credit score will be lowered by several points. Most lenders will move quickly through this step, and if you submit all they need, you could get your money in a matter of days.
What is the best reason to put when applying for a personal loan?
Personal loans are frequently taken out for the purpose of debt consolidation. Research in 2022 found that the top reason people with outstanding credit sought out personal loans was to consolidate debt. You can also list medical emergencies as necessary expenses.
Do you have to give a reason when applying for a personal loan?
Getting a personal loan is possible for most people, but you still have to justify your financial necessity for the borrowed funds. Borrowing money is normally yours to do with as you like, though certain lenders may place conditions on how the money can be used.
What does loan purpose mean?
The reason a borrower approaches a financial institution for assistance is known as the loan's purpose. Any costs incurred in bringing your financial situation under control, such as those associated with your wedding, your health, your schooling, or your home improvement project.
Can you use personal loan money for anything?
To a certain extent, you can use a personal loan to cover just about any expense. Consolidating debt, making major purchases, or fixing up the house as an alternative to a home equity loan, are all good applications for a personal loan, but paying for school or making an investment is not.
Can I get a personal loan and not use it?
Mostly, if you have applied for an unsecured personal loan, the lender will not be concerned with how the money is spent. A debt consolidation loan, however, stands out from the rest because it was designed to help borrowers tackle a specific financial challenge.
The article was useful
Like0
Dislike0
