Credit card offers pop up in your mailbox all the time — but while they can be an easy way to get quick cash, a personal loan may be a better option if you’re in need of a large amount (after all, there is such thing as a credit limit).
Personal loans can provide lower interest rates, quicker financing, shorter repayment options, and access to higher loan amounts than credit cards and other types of loans. Plus, personal loans offer lots of flexibility by putting borrowers in charge of how to use the lump sum.
5 things you should use a personal loan for
While a personal loan can be used for virtually any reason, there are some top reasons people leverage this specific form of financing. Here are five things you should use a personal loan for.
- Large purchases
- Debt consolidation
- Home improvement projects
- Emergency expenses
- Small businesses
Here’s what you need to know if you’re considering a personal loan for one of these reasons.
1. Large purchases
A recent survey of personal loan borrowers by the credit bureau Experian found that 28% used the money to make a large purchase. While the reasons weren’t disclosed, a large purchase could be an appliance (like a washer and dryer or refrigerator), car, boat, computer, engagement ring, or honeymoon.
According to the Federal Reserve, the average personal loan interest rate is 9.5%, which is a lower interest rate than the average credit card interest rate of 14.52%. It’s important to note, though, that some lenders will charge fees for personal loans, such as an origination fee, so make sure you factor in all the costs when determining the best form of funding.
2. Debt consolidation
The second most common reason borrowers cited for taking out a personal loan is to consolidate debt. For example, if you have high-interest credit cards, moving the balances to a single personal loan could help you pay off your debt faster by providing a firm end date on your loan term.
Debt consolidation can lower your monthly bills by combining multiple balances, such as a payday or auto loan, into one payment. And low personal loan interest rates could reduce the total amount you would pay over the term.
3. Home improvement project
In the Experian survey, 17% of personal loan users borrowed money to finance a home renovation. Investing in your home can pay off when you’re ready to sell. According to HGTV, bathroom remodels, landscaping, kitchen remodels, exterior improvements such as vinyl siding or paint, and attic bedroom conversions provide the best return on your money.
While some homeowners take out a home equity loan or line of credit to pay for a home improvement project, a personal loan won’t require you to use your house as collateral, so it involves less risk for those who borrowed money.
4. Emergency expenses
Thirty percent of personal loan borrowers cite “other reasons” in the Experian survey, and one of those could be to pay for an unexpected expense. Some emergencies can come with high price tags, such as a hospital visit, car repair, urgent dental work, or even a funeral. A personal loan can help reduce the emergency’s stress by providing a way to pay the bill.
5. Small businesses
Another common reason you may look into taking out a personal loan is to get funding for your small business. During the coronavirus pandemic, many small businesses received help from the government with Paycheck Protection Program (PPP) loans. If they have a strong credit score, a personal loan could help sustain them during an uncertain economy if more money is needed.
In addition, many people who lost their jobs due to the coronavirus may decide to become self-employed by launching their own business. A personal loan could provide the funding needed to purchase the necessary supplies and equipment.
Personal loans can be one of the most effective financial tools, but only if the monthly payment fits your budget. Do your homework by shopping around for the best rates and by using a personal loan calculator to determine how the debt would impact your finances.
