Top 5 Reasons to Get a Personal Loan

Personal loans can be used for almost any expense, including debt consolidation, home improvement projects, large purchases and emergencies. Personal loans may be advertised specific to their use — home improvement loans, travel loans or medical loans — but they function the same way.

The best way to use a personal loan is to reach a financial goal, such as consolidating high-interest debts or financing a home improvement project that adds value to your home. Compare personal loans with other financing options to find the one that best fits your plans and budget.

A personal loan is a lump sum that you borrow from a bank, credit union or online lender and repay in fixed, monthly installments. Loan amounts range from $1,000 to $100,000, with repayment terms from two to seven years. The cost of the loan, or annual percentage rate, is usually from 6% to 36%.

Unlike auto and home loans, most personal loans are unsecured, meaning they’re not backed by collateral like your car or house. The approval decision and rate are based on your credit, income and other debts.

Personal loans break up large expenses into smaller, easier-to-manage monthly payments over the course of a few years. The most common reasons for a personal loan include:

• Debt consolidation or refinancing.

• Home improvement projects.

• Medical bills.

• Life events and discretionary expenses.

• Emergencies.

1. Debt consolidation or refinancing

If you carry multiple forms of debt, you can use a personal loan to consolidate it. A debt consolidation loan combines unsecured debts like credit cards and medical bills into one payment, ideally with a lower interest rate. This approach saves you money and can help you pay off the debt faster.

» MORE: Use our debt consolidation calculator to see how much you could save

A similar reason to get a personal loan is to refinance an existing loan. It works the same way as a debt consolidation loan: If your credit and income have improved since you first got the loan, you can refinance it at a lower interest rate to save money and pay off the debt faster.

Consider whether the new loan comes with any fees, like an origination fee, that would offset your savings.

Compare to: 0% APR balance transfer credit card

A zero-interest balance transfer card is another way to refinance or consolidate debt. You’ll pay no interest if you pay off the balance within the card’s 0% APR promotional period, typically 15 to 21 months. If you don’t pay the balance in that window, though, you’ll begin to pay the credit card’s regular interest rate, which is often 20% or higher.

2. Home improvement projects

You can use a personal loan to fund a home improvement project, like a kitchen or bathroom remodel.

Unlike home equity financing, personal loans don’t require your home as collateral. Loans are usually funded within a week of approval and some lenders offer extended repayment terms for home improvement loans.

» MORE: Best home improvement loans

Compare to: Home equity loan or home equity line of credit

A home equity loan is a fixed-rate installment loan that is secured using the equity in your home. A home equity line of credit, or HELOC, also uses your home as collateral, but it’s an open credit line that you can draw on as needed.

Home equity financing options usually have lower rates and longer repayment terms than personal loans, but you must have enough equity to borrow against.

» MORE: Compare home improvement financing options

3. Medical bills

Personal loans can be used to cover medical, dental or other health care costs, like an emergency procedure, cosmetic work, costly out-of-network charges or a high deductible. Borrowers can also use a personal loan for fertility treatments like egg freezing or IVF.

Compare to: A payment plan with your medical provider

Ask your medical provider if they offer an interest-free payment plan to break up the cost of a procedure. Other options to pay your medical bills include hiring a medical bill advocate or seeking out financial assistance through a public program or private organization.

4. Life events and discretionary expenses

Most financial experts don’t recommend using a personal loan for discretionary expenses, but some big-ticket life events may require outside financing.

For example, a wedding can cost more than $30,000, and not every couple can pay outright. Wedding loans are one way to cover the difference.

A big vacation can add up, too. Though fly now, pay later payment plans are becoming increasingly popular, traditional vacation loans are another option to cover a dream trip.

Compare to: Rewards credit cards

Paying for a big expense with a rewards credit card can earn you cash back, points or airline miles. Weigh the benefit of those perks against the interest costs. You’ll avoid interest entirely if you can delay the event, save money and pay for it in cash.

5. Emergencies

If your car breaks down or you need to fund an emergency, a personal loan can see you through. Look for small personal loans with a maximum APR of 36% and monthly payments you can afford, and plan to repay your loan as soon as possible to avoid a cycle of debt.

Personal loans are typically a better choice than a payday or pawnshop loan, both of which can charge triple-digit interest rates. However, long-term, interest-bearing debt may not be your only option in a crisis.

» MORE: How long does it take to get a personal loan?

Compare to: Low- and no-cost borrowing alternatives

Even if you need funds fast, it’s worth your time to consider affordable alternatives, like a family loan or assistance from a local nonprofit or charity organization. If you have an emergency fund you can use, even better.

Here are three expenses that personal loans usually can’t cover:

1. A home down payment: FHA programs and most banks prohibit the use of personal loan proceeds for a down payment on a home. Taking out a personal loan also adds to your debt-to-income ratio, which may make it difficult to get favorable terms on a mortgage. Consider down payment assistance programs or a family loan instead. 

2. College tuition: Many personal loan lenders prohibit using their loans for educational expenses. Instead, public and private student loans are designed to help pay for college tuition. They have longer repayment periods, often at lower rates than personal loans. 

3. Starting a business: Some lenders prohibit using personal loans to start a business. If you are starting a business, consider a small-business loan from the SBA or another lender. 

Here are features to compare as you shop for the best personal loan.

Costs

Annual percentage rate: A loan’s APR represents its total cost, including the interest rate and additional fees. Use the APR to compare one loan with another or with other financing types, such as credit cards.

Monthly payment: Check the loan’s expected monthly payment against your budget to be sure there’s room for it. You can use a personal loan calculator to see what rate, loan amount and term will get you the most affordable monthly payments.

Fees: Many lenders charge late fees, and some may charge origination fees. An origination fee is included in your APR, but many lenders take it from the loan funds, effectively reducing your total loan amount.

» MORE: Pros and cons of personal loans

Repayment terms

A loan’s repayment term affects the monthly payment and total interest charges. Shorter-term loans have higher monthly payments but lower interest costs. Look for a repayment term that keeps payments manageable but saves you as much on interest as possible.

Loan amounts

Some lenders offer small or midsize loans of $1,000 to $50,000, while others provide loans of up to $100,000. Decide how much you need before shopping around so you can rule out some lenders.

Additional features

If you have multiple competitive offers, compare other loan features such as funding time and whether the lender offers hardship assistance or a mobile app to make managing your account easier. Finding a lender that tailors its loan to your needs could break the tie.

» MORE: How to apply for a personal loan