What Are Personal Loans Used For?
A personal loan can be used for a variety of reasons. They might be called certain things for advertising reasons such as travel loans, relocation loans, and consolidation loans. However, personal loans all work the same way.
Personal loans, unlike car loans or home loans, are unsecured loans. This means they’re not backed by any collateral. It also means approval for a personal loan primarily depends on your creditworthiness.
A lot of people use personal loans to improve their finances. Common strategies are paying off high-interest debt with a low-rate personal loan or paying for a home improvement project to increase your home’s value.
Here are 5 ways you could use a personal loan.
1. Debt consolidation
If you have multiple sources of high-interest debt, it could make sense to consolidate with a personal loan.
Debt consolidation can help make your high-interest debts more manageable, more affordable, and easier to pay off since you now have one payment, once a month.
Keep in mind though, consolidating your debt with a personal loan only makes sense if you can get a lower interest rate than your existing debts.
Before consolidating your credit card debt, you'll also want to make sure that your spending habits are under control and you can afford the monthly payments. Make sure you aren’t tempted to overuse your credit cards.
Use our helpful debt consolidation calculator to see if a personal loan is right for you.
2. Emergency loans
It’s always a good idea to build an emergency savings fund to help cover unexpected expenses. But life happens and sometimes you’re not prepared. Or maybe you’ve been hit with multiple expenses and your emergency fund is drained.
Whatever the reason, a personal loan could help cover emergencies or life events like:
- You lost your job or had your hours reduced
- Your car needs repairs
- Friend or family member in need
Personal loans are always a better choice than a payday loan or pawning your valuable items. Payday and pawnshop loans often charge interest rates in the triple digits. You could find yourself in a never-ending cycle, taking out one high-interest loan to pay off another.
3. Medical bills
Sometimes you can’t afford to not go to the hospital or dentist, even if you can’t actually afford it. Emergency procedures, out-of-network charges, or high-deductibles can be covered by a low-interest personal loan.
4. Home repairs
Taking out a personal loan to cover your “wish list” items is probably not a smart strategy. It’s probably better to save for that bathroom remodel over time.
However, some home repairs or upgrades simply can’t wait. These could include:
- Broken heating or air conditioning
- Blocked or busted pipes
- Gas leaks
A personal loan could help you pay for these repairs over time. And they have the added benefit of not requiring your home as collateral.
5. Relocation costs
Moving can be exciting, but it’s also expensive. Whether you’re moving cross-town, cross-state, or cross-country, a personal loan can help cover the costs.
As always, make sure you can afford the monthly payments before you take out a personal loan. Is taking out a loan the best way to pay for your move? Or would it be smarter, financially speaking, to dip into your savings?
There are many ways to use a personal loan and many reasons to get one. Unexpected expenses, moving costs, or necessary home repairs can all be covered with a low-rate personal loan.
Before you take out a loan, make sure you have good financial habits and can afford to make the monthly payments.
If you have questions about personal loans, check out our free Financial Education Center. Or, if you’ve taken out a loan you can’t afford, we offer free, confidential financial counseling to help get you back on track.