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A personal loan can be used for just about anything. You might see them advertised differently — as 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. Compare personal loans with other financing options to find the one that best fits your plans and budget.
How do personal loans work?
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 your rate are based on your creditworthiness, income and other debts.
Banks, credit unions and online lenders offer personal loans with amounts from $1,000 to $100,000 and annual percentage rates between 6% and 36%.
Since personal loans often have fixed rates, the monthly payment stays the same for the full loan term — usually two to seven years.
Reasons to get a personal loan
1. Debt consolidation
If you’re carrying multiple forms of debt, you can use a personal loan to consolidate it. Known as a debt consolidation loan, it 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.
Use our debt consolidation calculator to plug in your current balances, interest rates and monthly payments and see how much you could save by consolidating.
» MORE: Best debt consolidation loans
2. Home improvement project
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 you to use the home as collateral. They’re usually funded within a week of application and some lenders offer extended terms on loans used to remodel.
» MORE: Best home improvement loans
Personal loans usually have higher rates and larger monthly payments than other home improvement financing options, so shop around to find financing that fits your budget.
3. Refinancing an existing loan
Many lenders allow you to use a personal loan to refinance an existing loan at a lower interest rate. This works the same way as a debt consolidation loan: By refinancing at the lower interest rate, you can save money and pay off the debt faster, usually with no prepayment fee.
If your credit has improved since taking out the initial loan, you may be able to qualify for an especially competitive rate. Consider whether the new loan comes with any fees, like an origination fee, that would offset the savings.
» MORE: Best personal loan rates
4. 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.
5. Weddings, vacations and other discretionary expenses
Some big-ticket life events may require outside financing. For example, a wedding can cost more than $20,000, and not every couple can pay outright. Wedding loans are one way to cover the difference.
Most financial experts don’t recommend using a personal loan for discretionary expenses. You’ll avoid interest if you can delay the big event, save money and pay in cash.
If your car breaks down or you need to fund an emergency home repair, 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 make a 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. Compare loans with low- or no-cost alternatives, like a family loan or cash advance app.
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What to look for in a personal loan
Here are features to compare as you shop for the best personal loan.
Annual percentage rate: A loan’s APR represents its full cost, including the interest rate and additional fees. Use the APR to compare one loan with another, or to compare it with other types of financing 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.
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.
Some lenders offer small or midsize loans of $2,000 to $40,000, while others offer loans up to $100,000. Decide how much you need before shopping around so you can rule out some lenders.
If you have multiple competitive offers, compare the loans’ features beyond the terms. Some lenders offer fast funding, unemployment protection or credit building tools. Finding a lender that tailors its loan to your needs could break the tie.
Pre-qualify to compare offers
Many lenders let you pre-qualify for a personal loan online to preview your potential rate and loan amount. The process involves a soft credit check, so your credit score won’t be affected, and usually takes a few minutes.