Personal loans can help you out when you need to borrow money for a variety of reasons. This type of lump-sum loan is paid back in monthly installments over a set term, usually ranging from one to seven years. The amount you can borrow will depend on your credit history, but common offers fall between $1,000 and $50,000 and as much as $100,000.
Just like it sounds, a personal loan can be used for personal reasons. With any debt, it’s essential to consider how the payment will impact your finances, but there are many situations where a personal loan may be a good choice.
1. Debt consolidation
If you have several outstanding loans with high-interest rates, combining them into one can help you reduce your monthly payment. This is called “debt consolidation,” and it’s one of the most common reasons people take out a personal loan. The personal loan often has a lower interest rate than some of the other debts you may have, which can reduce the total amount you will repay over its term.
Credible makes it easy to find the best personal loan for this purpose — just insert your desired loan amount into their free online tool and you can compare rates and terms from multiple lenders at once without impacting your credit score.
Be careful if you use a personal loan to pay off credit card balances. One pitfall could be being tempted to charge new debt on those cards. You’ll need to practice self-control, or you could find yourself worse off than before you consolidated your debt.
If your credit is good, you may also look into balance transfer cards that offer 0% APR. You can transfer your credit card balances and pay it off without interest.
If you go this route, just be confident you can pay it off before the end of the promotional period. If you don’t, you’ll be charged interest that accrues from the original date of the transfer, which can be much higher than the interest charged on personal loans.
2. Cover emergency expenses
According to the Federal Reserve, only 40% of Americans have a fully-funded emergency account, which covers three to six months of expenses. If something arises, you may need to resort to getting a personal loan. Emergency expenses could consist of unplanned medical fees, expensive car repairs, or even funeral costs. Any of these situations can quickly add up to a few thousand dollars or even more. Even if you have insurance, you may have to meet a high deductible.
Once you’re back on your feet, you can start building your emergency fund, so you aren’t faced with this dilemma again.
3. Make a large purchase
A personal loan could also finance a big purchase, such as a new appliance, car or engagement ring. You can also use it to pay for tuition, a wedding, or a vacation. In these cases, though, it’s best to consider your needs versus your wants. Buying a car can help you get to work. Paying for tuition can help you improve your career outlook. And replacing a defunct refrigerator or stove can help you maximize your food budget. If you’re using a personal loan for a large purchase, make sure the monthly payment comfortably fits your budget. And shop around for the best deal on that large purchase, so you aren’t tempted to get a loan for more than you need.
4. Pay for moving costs
According to Moving.com, the average local move costs $1,250, while moving long-distance costs an average of $4,890. If you’re moving due to a new job or family situation, taking out a personal loan may help you pay for the expenses. You may also need to purchase new furniture or household goods for your new home or pay for travel expenses. Before you take on debt to make a move, make sure that your new income will be enough to cover the monthly loan payment.
5. Remodeling a home
Remodeling your home can increase its value as well as make necessary repairs that protect your investment. A personal loan is one option for getting the funding for projects such as replacing the roof, updating the kitchen or finishing the basement. If you have equity in your home, you may decide to go with a home equity line of credit or home equity loan. However, personal loans could be a good choice since they don’t require collateral, which means you don’t put your home at risk if you’re unable to repay it.
6. Start a small business
Nearly two-thirds of Americans want to own their own business. And as the saying goes, “It takes money to make money.” A personal loan can be a good vehicle for getting the funding you need to start your own company. You can use it to hire a website designer, order initial inventory, pay your rent, or cover payroll until you start generating revenue. Make sure your business plan includes a way to make your monthly payments while you’re getting your business off the ground.
The bottom line
Personal loans can be used for a wide variety of reasons, but there are two things every borrower should do before applying. First, find the best personal loan rates.
Second, make sure the loan fits your budget. Remember, you’ll be paying interest on the loan, so use one responsibly. That boat or vacation may be fun, but you don’t want its expense to hurt your credit score and financial health in the long run.
