A personal loan can be used for just about anything. You might see them advertised differently — as consolidation loans, travel loans or medical loans — but they function the same way.
Unlike auto and home loans, most personal loans are unsecured, meaning they’re not backed by collateral like your car or house, but based on your creditworthiness. They can have interest rates ranging from 6% to 36% and repayment terms from one to seven years.
Personal loans are best used to improve your finances, like paying off high-interest consumer debt or funding a home improvement project that may increase the value of your home.
What is a good reason to get a personal loan?
1. Debt consolidation
If you’re carrying an unmanageable amount of debt, you can use a personal loan to consolidate it. Known as a debt consolidation loan, it combines multiple 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.
For example, if you owe $10,000 across three credit cards, with a combined annual percentage rate of 16% and a combined monthly payment of $500, it will take just under two years to pay off the cards and cost $1,500 in interest.
But if you consolidate the cards into a loan with a 12% APR and a two-year repayment term, you’d save $200 in interest. You’d also lower the monthly payment by about $30, which you could apply to the loan to pay it off even faster.
Use our debt consolidation calculator to plug in your current balances, interest rates and monthly payments and see how much you could save with a debt consolidation loan.
» MORE: Best debt consolidation loans
Alternative: A 0% APR balance transfer card may be a better alternative if you can pay off your entire debt during the zero-interest promotional period, which can last up to 18 months. You generally need good or excellent credit (690 FICO score or higher) to qualify.
2. Home improvement project
You can use a personal loan to fund a home improvement project, like a kitchen or bathroom remodel. Ideally this project would increase the value of your home.
Unlike other home improvement financing options, personal loans don’t require you to have equity in the home or put up the home as collateral, but you may pay more in interest.
» MORE: Best home improvement loans
Alternatives: Consider a home equity loan or line of credit. Since both alternatives draw upon the equity in your home, you may get a lower interest rate and a longer repayment term, up to 20 years. But because you’re using your home as collateral, you could lose it if you can’t repay.
3. Refinancing an existing loan
Many lenders will 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. By taking the steps to pre-qualify, you can see potential rates without impacting your credit score.
Alternative: A 0% APR balance transfer card is a good option here too, as long as you can pay off the debt in the promotional period. Focus on building your credit to qualify for a zero-interest card.
Other reasons to get a personal loan
Though refinancing debt and investing in your home are particularly smart uses of personal loans, there are other scenarios where taking out one may make sense after you’ve ruled out cheaper financing alternatives.
4. Medical bills
Personal loans can be used to cover medical, dental or other health care costs, like an emergency procedure, costly out-of-network charges or a high deductible.
However, medical loans can be one of the most expensive ways to finance your health care, so you should consider other alternatives first.
Alternatives: To pay off medical debt, try to set up a payment plan with the hospital or provider. These plans usually charge little to no interest. A medical credit card, usually reserved for specific medical procedures, can also come with interest-free periods of six to 12 months.
5. Weddings, vacations and other discretionary expenses
Some big-ticket life events may require outside financing. For example, the national average cost of a wedding is $28,000, and not every couple can pay outright. Wedding loans are one way to cover the difference.
Alternatives: For nonessential expenses, it’s better to cut costs, so you can stretch your savings further. If that’s not an option, a cash-back credit card or travel credit card may be a better financing choice than a personal loan, since you’ll earn rewards on the purchase.
If your car breaks down or you need to fund an emergency home repair, a personal loan can see you through. Personal loans are almost always a better choice than a payday or pawnshop loan, both of which can charge triple-digit interest rates.