The 5 Best Reasons For A Personal Loan
4-Minute ReadMay 19, 2022
There are many reasons for personal loans – maybe you’re strapped for cash and need help paying a few bills, or you’re making a large, one-time purchase. Personal loan products can help you remove barriers and achieve your financial goals. However, that doesn’t mean it’s always the best choice for your own situation.
We’ll cover the five best reasons for taking out a personal loan (and three ways you shouldn’t use one). Before signing the dotted line, however, it’s crucial that you understand what a personal loan is, and whether it would suit your financial needs.
What Is A Personal Loan And How Does It Work?
A personal loan is a type of credit where financial institutions like online lenders, banks and credit unions offer cash for a variety of purposes. These loans are usually unsecured, meaning you don’t have to offer any collateral.
Personal loans offer different terms and rates based on the applicant. Your loan document will show its repayment plan, or how long you have to pay it back (typically the number of months or years), the APR/interest rate and monthly payment. Depending on the lender, you could also pay an origination fee. Calculated as a percentage of the total loan amount, this fee is what lenders charge to process and approve your loan.
A lender will check your credit history and score when deciding whether to grant you a personal loan. They’ll also examine documents related to your income and current debts to determine whether you can handle another monthly loan payment. They will also look at other factors like your income and any other debts you have to decide if you can handle another loan payment. Sometimes, the funds can even get distributed to your bank account the same day if the lender approves your application.
5 Reasons To Get A Personal Loan
Now that we’ve covered the basics of what a personal loan is and how it works, let’s take a look at what a personal loan can be used for. There are technically very few limits to how you can use your funds outside of what’s mentioned in your loan agreement , but these are some of the top reasons to get a personal loan:
1. Debt Consolidation
One of the top reasons people get a personal loan is to pay off a bunch of high-interest debt (like credit cards) by combining them into one fixed-rate monthly payment. Doing so can save you a significant amount of money, especially if the interest rate is much lower than that of your credit cards. It can also help improve your credit score long-term by improving your credit utilization ratio.
2. Remodeling Your Home
If you’re anticipating some home renovations and need a large chunk of money to cover them, a personal loan can be a great choice. It’s especially helpful if you don’t have enough equity to qualify for a home equity loan, or if you need the funds quickly. Once you’ve secured a personal loan, there’s no limit to what projects you can apply it to. You can use a personal loan for projects like a new roof, new landscaping or the remodeling of your kitchen to add value to your home.
3. Unplanned Emergency Expenses
It can be all too easy to find yourself saddled with unexpected expenses. Maybe you have a huge medical bill and don’t know how to pay it, or you got caught with a nasty IRS bill, or even found yourself with an unplanned funeral expense or costly lawyer’s fees in lieu of a divorce. These situations are never pleasant, but a personal loan could be exactly what you need to ease the financial burden and move forward.
4. Large Purchases
A personal loan can be useful in emergencies or to cover necessary expenses, but many people also take out loans to fund major life moments. Weddings, family planning, dream vacations and moving expenses are all valid reasons to take out a personal loan. Just remember to treat it like any other line of credit – once the fun is done, you still need to pay back the loan.
5. Buying A Car
Yes, you can use a personal loan to buy a car, but keep in mind that you may not get the best deal. Auto loans use your vehicle as collateral, so interest rates are normally lower than an unsecured personal loan. However, auto loans tend to also need a down payment, whereas personal loans do not.
In other words, take the time to compare rates on both auto loans and personal loans to see what’s the better deal. Personal loans might be a better fit when it comes to major vehicle repairs and car expenses, like getting four new tires.
3 Ways You Can’t Use A Personal Loan
While you can use a personal loan for almost any purpose, lenders do impose a few restrictions. Some lenders might stipulate in your agreement or contract what specific purpose your personal loan can be used for. If that’s the case, then deviating from that purpose would be a breach of contract and make you vulnerable to legal action and additional fees. Be sure to carefully review your agreement before applying your loan funds.
Here are a few major ways you shouldn’t use a personal loan:
1. Paying For College
It’s not illegal to use your personal loan to pay for college tuition. However, it’s not necessarily a move that would make financial sense. Many personal loan lenders offer loan amounts with repayment periods starting as short as 12 months and going up to 60 months. In general, personal loan interest rates tend to be higher than most student loan offerings.
It may make more sense to take out student loans through your college or university when thinking about loan forgiveness, student aid and payment flexibility (no monthly payments until 6 months after graduation). If you need help financing your child’s education prior to college, consider taking out a K-12 private school loan.
2. Illegal Activities
It should go without saying, but a lender isn’t going to approve a personal loan for anything that breaks the law. This includes using funds for things like purchasing narcotics or illegal gambling activity. When it comes to your personal loan and the law, common sense should be your guiding light. If you’re still unsure, review state and federal laws to make sure you’re not taking any unnecessary risks.
Along the same vein: Don’t use money from a personal loan at a casino or other places where you’re engaging in gambling activities. Even if it’s a legal gambling establishment, it’s not something that any lender is ever going to approve. Using your personal loan for gambling would constitute a breach of the loan agreement and likely incur fees and legal action against you.
If you’re not sure whether your reasons for a personal loan are acceptable to your lender, simply ask! It’s better to find out now than later when a lender decides to take legal action against you. As a general rule, if it doesn't feel right, it probably isn't right.
Find Out If A Personal Loan Is Right For You
There are many benefits to obtaining a personal loan, one of them being you can access needed funds at a potentially lower interest rate compared to credit cards. But that doesn’t automatically mean a personal loan is the right choice for you.
Carefully consider factors such as whether you really need the funds – do you truly need the extra money for that luxury ocean cruise? Or will taking out a personal loan enhance your financial situation? Think about whether you can easily afford the loan payments and if the installment fees are something you believe are reasonable.
If so, then a personal loan may be right for you. Get started today by reviewing our Rocket Loans personal loan process and exploring all your options.
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