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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 creditworthiness, income and other debts.
Reasons to get a personal loan
1. Debt consolidation
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.
Use our debt consolidation calculator to plug in your current balances, interest rates and monthly payments to 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 your home as collateral. Loans are usually funded within a week of application and some lenders offer extended terms for home improvement loans.
Personal loans typically have higher rates and larger monthly payments than other home improvement financing options, so compare alternatives to find the one that fits your budget.
» MORE: Best home improvement loans
3. Refinancing an existing loan
Many lenders allow you to use a personal loan to refinance an existing loan at a lower interest rate. It works the same way as a debt consolidation loan: By refinancing, you can save money and pay off the debt faster 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. Borrowers can also use a personal loan for family-building procedures like egg freezing or IVF.
5. Weddings, vacations and other discretionary expenses
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.
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, 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.
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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 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.
Starting a business: Few lenders provide personal loans to start a business. If you are starting a business, consider a small-business loan from the SBA or another lender.
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 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.
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 $1,000 to $40,000, while others provide loans of up to $100,000. Decide how much you need before shopping around so you can rule out some lenders.
If you have multiple competitive offers, compare the loans’ features beyond the terms. Some lenders offer fast funding, unemployment protection or a mobile app to make managing your account easier. Finding a lender that tailors its loan to your needs could break the tie.
How to apply for a personal loan
Most lenders have online personal loan applications, but some banks and credit unions may require an in-person visit. Here are the three steps to apply for a personal loan.
Check your credit. Your credit score is a top factor that lenders consider when determining whether you qualify and what your rate should be. Borrowers with good or excellent credit scores (690 or higher) often get the lowest rates. Check your credit report and correct any mistakes that might be hurting your score.
Prequalify and compare lenders. Many lenders offer pre-qualification online, which lets borrowers preview potential personal loan rates and terms. Prequalifying requires only a soft credit check, which doesn't impact your credit score, so you can compare offers from multiple lenders. The best offer typically has the lowest APR and a monthly payment that fits comfortably into your budget.
Apply. When you’re ready to apply, you can submit a formal personal loan application. Lenders will ask to verify your identity and income, and they will run a hard credit check, which may cause your credit score to drop by a few points. If approved, you can expect the money within a week; your first loan payment is typically due in 30 days.
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