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Personal loans can be used for almost any expense, including debt consolidation, home improvement projects, large purchases and emergencies. You may choose to use a personal loan for more than one reason.
Personal loans may be advertised for a specific use — travel loans or medical loans, for example — but they function the same: The lender gives you a lump sum of money that you repay in monthly installments over a set period of time.
Most lenders will ask you for the reason you’re requesting a loan when you apply for one. Some lenders only provide personal loans for specific purposes, while others offer special rate discounts or exclusive terms for certain loan purposes.
» MORE: Compare the best personal loans
Nerdy Perspective
While you can use a personal loan for almost anything, it’s most ideal when a personal loan is the least expensive borrowing option or when it helps to improve your financial situation. For example, consolidating high-interest credit card debt with a personal loan at a lower interest rate can help you get out of debt quicker and pay less in interest.
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5 common reasons to get a personal loan
The most common reasons for a personal loan include:
- Debt consolidation or refinancing.
- Home improvements or repairs.
- Medical bills.
- Life events and discretionary expenses.
- Emergencies.
Your reason for getting a personal loan could overlap more than one category.
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 annual percentage rate. This approach saves you money and can help you pay off the debt faster.
Use our debt consolidation calculator to see how much you could save with a debt consolidation loan.
A similar reason to get a personal loan is to refinance an existing loan. It works the same way as a debt consolidation loan: You take out a new loan with a lower interest rate to replace an existing loan.
Refinancing a personal loan can be a solid option if your credit score or income has increased since you first got the original loan, which means you may qualify for a lower interest rate. Check if the new loan comes with an origination fee that could offset what you’d save in interest costs.
Compare to: 0% APR balance transfer credit card
A 0% APR 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 can be higher than 20%.
2. Home improvements or repairs
You can use a personal loan to fund a home improvement project, like a new roof or kitchen remodel — or a home repair, like a broken window or leaky pipe. Financing home improvement work with a personal loan can help to increase your home’s value.
Personal loans are typically unsecured loans, which don’t require your home or any other asset as collateral. While most personal loans have repayment terms up to seven years or less, some lenders offer longer 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. You also risk losing your home if you fall behind on repaying on a home equity loan or HELOC.
3. Medical bills
Personal loans can be used to cover medical, dental or other health care costs, like an emergency procedure, fertility treatments, costly out-of-network charges or a high deductible. Borrowers can also use a personal loan for cosmetic surgery.
» MORE: Best medical loans
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. However, some big-ticket life events may require outside financing. Just make sure you can comfortably afford the monthly payments on the loan.
A wedding, for instance, can cost more than $30,000. Not every couple can pay those costs outright, but that doesn’t mean they have to scrap all their wedding plans. Wedding loans are one way to cover the difference.
A big, bucket-list 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.
Some expenses you may choose to use a personal loan for are:
- Weddings.
- Vacations.
- Funerals.
- Furniture.
- Technology devices.
- Adoption or family planning procedures.
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 or purchase, save money and pay for it in cash. Set up sinking funds to put aside money for anticipated future expenses in the months leading up to the purchase.
5. Emergencies
If you need to fund an emergency, a personal loan can see you through. For example, if your car breaks down, you might need to borrow money to cover repairs and the cost of a temporary vehicle rental.
Several lenders offer next-day funding for personal loans, but if you need money even sooner, some offer same-day funding. Look for personal loans with maximum APRs no higher than 36% and monthly payments you can handle.
Personal loans are typically a more affordable 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.
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.
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What personal loans can’t be used for
Here are three expenses that personal loans usually can’t cover:
- A home down payment: FHA programs and many lenders 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.
- 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.
- 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 Small Business Administration or another lender.
🤓 Nerdy Tip
Even if you’re using a personal loan for an approved reason, it may not be the best way to borrow. Compare personal loans with other financing options to find the one that best fits your plans and budget. When to consider — and when to avoid — getting a personal loan
A personal loan could be a fitting option for you if:
- You can afford the monthly payments throughout the life of the loan.
- Your credit score is good or excellent (in the mid 600s or higher), increasing your chances of getting a low interest rate.
- You’re using the money for something you need, which you can’t put off and save up for instead.
On the other hand, you might want to reconsider getting a personal loan if:
- You only qualify for a high-interest loan (those with interest rates above 36%).
- You won’t be able to afford the loan payments each month.
- You have cheaper borrowing options.
- The loan is for something nonessential that can be delayed.
Frequently Asked Questions
Do you need to tell a lender what you’re using a personal loan for?
Most loan applications will ask for the intended purpose for the money. Some lenders may have special rates or terms for specific borrowing reasons, such as longer terms for home improvement loans or a rate discount for directly paying creditors on a debt consolidation loan.
What’s the best reason for a personal loan?
The best reason for a personal loan is to achieve a financial goal, like consolidating debt to fast-track your debt payoff plan or increasing the value of your home by financing a renovation project.
Can you use a personal loan to purchase a car?
Some lenders let you use an unsecured personal loan to purchase a vehicle. However, auto loans often have lower rates, because the car is being used as collateral.
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