6 Ways to Use a Personal Loan

How you spend the money from a loan is up to you. Common uses are debt consolidation and home improvement projects.

6 Ways to Use a Personal Loan

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You can use funds from an unsecured personal loan just about any way you want.

Use a debt consolidation loan, for example, to roll multiple debts into a single loan. Home improvement loans can help you install a new swimming pool or redo your kitchen. Personal loans may be marketed for different purposes, but when they're unsecured, you don't need to put up collateral like a house or car.

The best way to use one is to help improve your finances. That’s why debt consolidation — which can help you get rid of debt faster — and home improvement projects — which can boost the value of your home — are popular reasons people get loans.

Consolidate debts

One of the most popular reasons people get a personal loan is to consolidate high-interest debts. Ideally, the rate you get on a debt consolidation loan is lower than the combined rate on your other debts.

When to consider: Debt consolidation loans are good for large debts that you need more than a year to repay. They’re also useful if you want to consolidate multiple types of debts, like a personal loan and a few credit cards.

Compare: If you qualify for a low rate on a personal loan, you may also qualify for a balance transfer card with a promotional 0% annual percentage rate. These are best for amounts you can pay off within about 12 to 18 months, because the cards may have high interest rates after the promotional period.

Refinance an existing loan

Many lenders allow you to refinance a loan either with them or a different lender. Refinancing can get you a loan with a rate that’s lower than the rate on the loan you already have.

When to consider: You’re more likely to qualify for a lower rate if you’ve seen positive changes to your credit score or reduced other existing debts since you first borrowed. If your finances have improved, it may be worth pre-qualifying to see whether lenders can offer you a better rate.

Compare: A better credit score improves your chances of qualifying for a 0% APR card. This is another time when you can use a balance transfer card to pay off smaller balances. Essentially, if you can make all your payments within the promotional period, you can finish out your loan interest-free.

Creditors usually report to credit bureaus monthly, so wait until you can see positive changes on your credit report or in your score before you apply for a new loan or credit card.

Home improvement projects

Personal loans are one of a few ways people fund their home improvement projects.

When to consider: A home improvement loan may be the right choice if you have little or no equity in your home or if you don’t want to use your home as collateral.

Compare: You'll likely get a lower rate and longer repayment term with a home equity loan or line of credit, while a cash-out refinance could give you cash and reduce your mortgage rate.

Medical bills

Unsecured loans can cover a high medical or dental bill or expensive cosmetic surgery. But using a personal loan to pay medical bills — which don’t often gather interest — is an expensive way to get rid of debt.

The average emergency room visit cost $1,389 in 2017, according to a report from the Health Care Cost Institute. Some lenders offer personal loans for $2,000 or less, but consider the overall cost.

A $1,389 loan with an 18% APR repaid over 12 months would cost an extra $139 in interest. At the end of the loan, you’ll have paid $1,528.

When to consider: Get a medical loan after you’ve considered all your options and determined that it’s the cheapest way to cover those bills. It’s an option if you qualify for a low rate on a loan and feel confident you can repay it on time.

If you do turn to a personal loan to cover medical or dental bills, compare offers from multiple lenders to see which can offer you the lowest rate.

Compare: Try to set up a payment plan with the doctor’s office or hospital that billed you. They may charge little or no interest.

You can also consider hiring a medical bill negotiator to lower your costs, as long as their fees don’t outweigh the savings you get.

Weddings, vacations and other discretionary expenses

You can bankroll life events with an unsecured loan, too.

The average price tag on a wedding ceremony and reception in the United States is $28,000, according to a 2019 study from wedding website The Knot. The least expensive way to pay for a big event like a wedding or vacation is with your savings.

When to consider: A personal loan gives you a fixed amount to budget against. These loans also have fixed interest rates and monthly payments, which can help you plan your payoff strategy.

Compare: Try identifying the nonessential parts of your plan to cut some of the costs.

If you have good or excellent credit (FICO score 690 and above), you may be eligible for a 0% APR credit card. Be sure you can pay off the card before the promotional period ends, usually after the first 12 to 18 months, to avoid a double-digit APR.

Travelers with good or excellent credit may be eligible for a travel rewards card with a promotional period. This type of card can also reduce your vacation costs in the future.

Emergencies

When an unexpected expense arises, like a car or home repair, a carefully chosen personal loan can help you through it.

When to consider: Rather than getting a payday or no-credit-check loan, look for reputable lenders that offer interest rates of 36% or lower and assess your ability to repay.

If you have good or excellent credit and can pay the loan back quickly, an emergency loan could be a cheaper option than putting the bill on your credit card. Those with a credit score below 690 or a lot of existing debt may be approved only for a loan with a high APR.

Compare: If you’re a credit union member with a lower credit score, you may have access to a low interest rate on a personal loan or a payday alternative loan.

You can search NerdWallet’s database of payday loan alternatives to find local charities, nonprofits or religious organizations that can offer assistance.

How to compare personal loans

Borrower requirements: Most lenders consider a loan applicant’s credit score, existing debts and income, among other factors.

Some lenders allow a borrower to have a lower credit score and instead focus on his or her earning potential, while others have hard debt-to-income requirements.

Rates and fees: Unsecured loan rates are usually between 6% and 36%. If you have excellent credit (FICO score 720 and up), little debt and high income, you’ll likely qualify for a rate at the low end of that range.

Be mindful of fees. Some lenders charge an origination fee, which is an amount, usually between 1% and 6% of the loan, that the lender skims off before distributing the funds. An origination fee is part of a loan’s APR.

Funding speed: If you need funds urgently, look for lenders that specialize in fast funding. Some online lenders say they can fund a loan either the same business day you’re approved for it, or within the next one or two days.

Repayment terms: Personal loan repayment terms tend to be between two and five years, but they can go as low as one year or as high as seven.

A repayment term that’s too short can mean high monthly payments, making it difficult for you to make on-time minimum payments. But the longer the term, the more total interest you’ll pay. Find a repayment term that works with your budget.

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