What Can You Do with a Personal Loan?
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 help you remove barriers and achieve your financial goals. However, that doesn’t mean it’s always the best choice for your own situation.
Before signing the dotted line, it’s crucial that you understand what a personal loan is, what you can and can’t use a personal loan for, 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.
Based on the applicant, personal loans offer different terms and rates. 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 pay an origination fee, which is a percentage of the total loan amount included in the amount lent. 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. It’ll 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.
What is a Personal Loan Used for?
There are many different uses for a personal loan. A few of them being:
Debt consolidation: Some people use a personal loan to pay off a bunch of high-interest debt (like credit cards), combining them into one fixed-rate monthly payment. Doing so can save you a significant amount of money, especially of the interest rate is much lower than your credit cards and you don’t need to pay an origination fee.
Remodeling your home: If you need a large chunk of money, a personal loan is a great choice if you don’t have enough equity to qualify for a home equity loan, or if you need the funds quickly. You can use a personal loan for things like a new roof, new landscaping or remodeling your kitchen.
Unplanned emergency 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. A personal loan could be exactly what you need to ease the financial burden and move forward.
Large purchases: Many people take out loans to fund life moments like their wedding, family planning, dream vacations and moving expenses.
Can I Use a Personal Loan to Buy a Car?
What Can't You Use a Personal Loan For?
While you can use a personal loan for almost any purpose, lenders do impose a few restrictions.
Here are a few ways you can’t use a personal loan:
Paying for college: 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 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 six months after graduation).
Illegal activities: This includes anything illegal (for obvious reasons), such as using funds for things like purchasing narcotics.
Gambling: Don’t use money from a personal loan to use at a casino or other places where you’re engaging in gambling activities.
If you’re not sure whether your reasons for a personal loan are acceptable to your lender, ask! It’s better to find out now than later when a lender decides to take legal action against you. Though, as general ruling, if it doesn't feel right, it probably isn't right.
Is it a Good Idea to Get a Personal Loan?
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 will 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. In this case, make sure to compare loan options and see what you may qualify for.
Above all else, remember that you need to pay back the loan amount in a timely manner, so start making plans now on how you’re going to do so.
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