A personal loan is one of the most versatile funding options for borrowers. A type of installment loan, banks and credit unions offer personal loans that allow you to borrow a lump sum upfront and repay the loan at a fixed interest rate in equal monthly payments.
Loan approval is based on your creditworthiness and debt-to-income ratio — how much debt you carry compared to your current income. Additionally, personal loans typically don’t require property to be held as collateral.
With a decent credit score and credit history, along with a steady income, qualifying for a personal loan is among the easiest ways to borrow money. Yes, you can use a credit card in a financial pinch, but personal loans generally have lower interest rates than credit cards, and can be used for just about anything.
Major life expenses and emergencies
Key moments in our lives require more than just a little money. Because personal loans are not dedicated to purchasing a home or vehicle like a mortgage or auto loan, so you can use the proceeds for significant or emergency expenses. Personal loans can be especially useful when unexpected expenses are higher than the funds in your savings account or emergency fund.
Home improvements
In addition to mundane but mandated home repairs, you can use a personal loan for home renovations to boost a home’s curb appeal, upgrade older appliances, transform a kitchen into a weekend chef’s playground, or convert a bathroom from “you don’t want to go in there” to spa quality.
Vehicle upgrades
It might be improving the reliability of your current vehicle, such as new tires or making repairs, so you don’t have to face the expense of buying a new car right away.
Medical bills
It’s almost impossible to plan for all the healthcare costs that can arise, even if you have insurance. A personal loan can cover a number of medical expenses, including elective surgeries, beneficial health treatments, cosmetic procedures, and even insurance coverage gaps.
Wedding expenses
This is a popular use for personal loans: covering the costs of wedding ceremonies, honeymoons, and all the other expenses related to the Big Day.
Vet bills
Pet care can be expensive, especially when it comes to a sick pet. A personal loan can help cover costs for vet care, medical treatments, or costly surgery.
Vacations
The price tag of a dream vacation can put fear into the hearts of even the most diligent savers. Financing travel expenses or holiday getaways are go-to uses for personal loans.
Moving costs
Eventually, all your stuff may not fit into the back of the pickup you borrowed from your brother. Covering expenses related to relocation can be a personal loan solution.
Funerals
Unfortunately, the sudden loss of a loved one can leave you with unexpected debt. A personal loan can help cover the expenses of funeral and burial costs.
Debt consolidation
Using a personal loan to lower the interest rate expense of outstanding debt can be an effective use of a personal loan. Here’s how consolidating debt with personal loans works:
Look at current personal loan rates and loan terms to find the best personal loan. Many banks and credit unions offer personal loans specifically to consolidate debt — these types of loans are called debt consolidation loans.
Fill out a loan application for a debt consolidation loan with a significantly lower interest rate than the debt you want to eliminate — the lower interest rate is key.
Use the loan to pay off credit cards or other high-interest debt immediately.
Avoid extending the personal loan’s payoff period beyond the current term of your old debt to avoid accumulating more interest charges
You’ll have one monthly payment with a low interest rate to manage rather than multiple bills with varying APRs
Business ventures and entrepreneurship
It can take a while to get a new business off the ground enough to qualify for a commercial or small business loan. If bootstrapping is out of reach, a personal loan may provide some seed money to cover business expenses if you’ve exhausted all other funding possibilities.
Until your business can qualify for credit on its own merits, personal loans can serve as a quick source of liquidity. However, the major downsides to keep in mind: Some lenders won’t allow borrowers to use personal loans for business expenses, and using a personal loan for your business costs means putting your individual credit on the line. Failing to repay the personal loan will show up on your credit report and lower your credit score.
Personal development and fun
You can use a personal loan to focus on career skills or self-improvement — paying for coursework or certification, attending professional workshops, or learning a new skill. You generally can’t use personal loans to pay for college tuition, and most lenders will not allow you to repay your student loans with a personal loan.
Have a large purchase in mind or looking to fund a hobby? Electronics, a boat, a motorcycle, or a recreational vehicle can be financed with the power of your good credit and a signature.
FAQs
Can I use a personal loan to buy a car?
Yes, you can use a personal loan to buy a car. However, an auto loan may be a better option. Auto loans tend to be easier to qualify for and often have lower interest rates than a personal loan.
Can I use a personal loan to start a business?
Yes, in some cases it is possible to use a personal loan to start a business. However, some lenders restrict borrowers from using personal loans for business purposes. Additionally, personal loans are issued to you as an individual, which puts your credit at risk if you cannot repay the loan. It may also be difficult to find a personal loan that will let you borrow the amount you need; small business loans often have higher loan amounts.
Can I use a personal loan for investing?
Yes, it is possible to use a personal loan for investing, but there are multiple lenders who prohibit loan funds from being used for investment purposes. Make sure you read your loan’s terms and conditions carefully beforehand. Additionally, any profits you make from your investment may be taxable, and if your investment loses money, you’re still on the hook to repay the full amount of the personal loan as outlined in the repayment terms. A brokerage firm is generally a safer bet if you’re looking to invest a loan.
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