Top 5 Reasons to Get a Personal Loan

You can use a personal loan to pay for almost anything. Common uses include debt consolidation, home improvement projects and emergencies.

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Updated · 3 min read
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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.

How do personal loans work?

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.

5 reasons to get a personal loan

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.

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.

See if you pre-qualify for a personal loan – without affecting your credit score
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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.

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.

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.

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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