The Best Reasons For A Personal Loan
Miranda Crace6-Minute Read
November 15, 2022
Personal loans can help you remove barriers and achieve your financial goals if you need some extra cash. However, this option may not be the best choice for your situation. When deciding whether to get a personal loan, consider how you’re planning to use it.
Let’s look at some of the best reasons for taking out a personal loan, some expenditures you shouldn’t use a personal loan for, and some circumstances where it’s simply not wise to seek a personal loan.
How Do Personal Loans Work?
A personal loan is cash that financial institutions such as online lenders, traditional banks and credit unions offer for a variety of purposes. These loans must be paid back in full and are usually unsecured, meaning you don’t have to offer any collateral to qualify.
Approved borrowers receive their personal loan amount in a lump sum and will immediately begin making monthly payments (or installments) to the lender. The rates and terms associated with personal loans differ based on the applicant. Your loan document will show your repayment plan, or how long you have to pay the loan back (typically, the number of months or years), the interest or annual percentage rate (APR) and the monthly payment amount.
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.
6 Good Reasons For A Personal Loan
Let’s take a look at what a personal loan can be used for. Other than anything specifically forbidden in your loan agreement, you shouldn’t technically be restricted in how you can use your loan money, but up next are some of the best reasons to get a personal loan.
1. Eliminating Credit Card Debt
Debt consolidation is one of the top reasons people get a personal loan. By combining several debts into one fixed-rate monthly payment, borrowers can pay off their high-interest debts (like credit cards). Consolidating debt can save you a significant amount of money, especially if you can get a lower interest rate than you had with your credit cards. It can also help boost your credit score long term by improving your credit utilization ratio.
2. Pursuing Home Improvements
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. You can use a personal loan for a number of home improvement projects, such as:
A personal loan is especially helpful if you need the funds quickly or don’t have enough equity to qualify for a home equity loan. Personal loans are also unsecured, while home equity loans use your home as collateral.
3. Covering Unplanned Emergency Expenses
It can be all too easy to become saddled with unexpected expenses. Examples of emergency costs include:
- Large medical bills
- A high tax bill
- Unplanned funeral expenses
- Lawyer’s fees after a divorce
- Auto repairs
These situations are never pleasant, but a personal loan could ease the financial burden and help you move forward.
4. Paying For Major Life Events
A personal loan can be useful for emergencies or covering necessary expenses, but many people take out loans to fund major life moments like:
These are all valid reasons to request a personal loan. Just remember to treat a personal loan like any other line of credit – once the fun is done, you still must pay it back.
5. Financing A Vehicle
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 with an unsecured personal loan. However, unlike personal loans, auto loans tend to need a down payment.
6. Making A Large Purchase
If you need a new home appliance but don’t have the cash readily available, you can use a personal loan to finance a new refrigerator, washer and dryer, or new HVAC system. It’s best to use a personal loan only for necessary appliances, so that bigger TV you’ve been wanting will need to wait until you can pay for it in cash.
3 Ways You Shouldn’t Use A Personal Loan
While you can use a personal loan for almost any purpose, lenders generally impose one or more restrictions that will likely be noted in your agreement or contract. Not conforming to these restrictions would be a breach of contract and make you subject to legal action and additional fees. Be sure to carefully review your agreement before applying your loan funds.
A personal loan is best not used for any of the following:
1. College Expenses
It’s not illegal to use your personal loan to pay for college tuition. However, doing so usually wouldn’t make financial sense. Many personal loan lenders offer loan amounts with repayment periods in the 12- to 60-month range. In general, personal loan interest rates are higher than the rates with student loan offerings.
When thinking about loan forgiveness, student aid and payment flexibility (no monthly payments until 6 months after graduation), it probably makes more sense to take out student loans through your college or university. If you need help financing your child’s education prior to college, perhaps consider 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 narcotics or illegal gambling activity. As it pertains to your personal loan and the law, let common sense be your guide. If you’re still unsure, review state and federal laws to make sure you’re not taking any unnecessary risks.
In the same vein: Don’t use money from a personal loan to gamble at a casino or other elsewhere. Even if you’re planning to visit a legal gambling establishment, no lender is going to approve a loan for this. Using your personal loan to gamble would likely constitute a breach of the loan agreement and result in fees and legal action against you.
If you’re not sure whether your reasons for requesting a personal loan are acceptable to your lender, simply ask.
Reasons Not To Get A Personal Loan
The possibility of using a personal loan for the wrong reason isn’t the only reason to reconsider applying for a personal loan. Don’t pursue a personal loan if:
- Your credit score is low: Your credit score is a major factor in the interest rate you qualify for, and a lower score means a higher rate.
- You can’t afford the monthly payments: If you live month-to-month on a budget, falling behind on payments or defaulting on the loan is a real possibility. Defaulting could cause immense damage to your credit.
- Another option makes more sense: If you qualify for another type of financing at a better interest rate, go with your better option. This could be in-store financing, peer-to-peer lending or even borrowing from an acquaintance.
- You can pay on your own: If you can afford to pay for something without jeopardizing your finances, it’s better to just eat the cost. Personal loan repayments will include interest fees, so buying with cash will save you money in the long run.
How To Get A Personal Loan
Seeking a personal loan shouldn’t be an off-the-cuff decision. Once you’ve decided you need a loan, shop around and compare lenders and offers. You’ll want to work with a lender offering the best rates and terms for your situation – and prequalifying is a great way to see an estimate of what you’re eligible for. Once you’ve chosen a lender, submit a full loan application.
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 debt to determine whether you can handle another monthly loan payment.
If approved for a personal loan, you can expect to receive your money in 1 – 7 business days. Sometimes, the funds can even hit your bank account the same day.*
A personal loan can have several benefits – one of them being access to funds at a lower interest rate than credit cards. However, this doesn’t automatically mean a personal loan is the right choice for you.
Carefully consider factors such as how much you need the funds and whether a personal loan will improve or hurt your financial situation. Think about whether you can easily afford the loan payments and whether the installment fees seem reasonable.
If you can check all these boxes, a personal loan may be right for you. Get started today by prequalifying with Rocket Loans℠.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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