Personal loans are good for a variety of purposes—from consolidating debt to putting in that pool your family has always dreamed of. But they are personal, which means your reasons are yours.
If you’re thinking about getting a personal loan, learn how they work before applying.
How Personal Loans Work Vs. Other Financing
Personal loans are usually a type of unsecured loan, meaning you aren’t required to offer collateral in case you don’t repay the loan. There’s nothing for a creditor to seize if you take out an unsecured loan and don’t repay it, but there are still consequences: Your credit score will be affected and your loan could go into default.
Unsecured loans use your credit score and credit history to determine if you qualify. While home and auto loans require you to use those loans for specific purposes, personal loans don’t have the same requirements. Instead, you can use a personal loan for almost anything, as long as it’s within the terms outlined in your loan agreement.
Personal loans are awarded in a lump sum, and you make monthly payments until your loan is paid in full.
5 Reasons for a Personal Loan
Personal loans can be used for practically any need you have—within reason and according to the terms of your loan. You can’t use the money for anything illegal, to gamble, or, in most cases, for postsecondary education expenses. Here are some good reasons to get a personal loan.
Emergency Cash Assistance
If you need money right away to cover bills, an emergency cost or something else that needs immediate attention, you can take out a personal loan. You can use a personal loan to cover emergencies like:
- Paying past-due home payments and utilities
- Medical bills
- Funeral expenses
- An unexpected car repair
A personal loan can be used as a form of debt consolidation, especially with credit card debt. It’s also a popular reason people take out a personal loan. Personal loans charge lower interest rates compared to credit cards, particularly if you have good credit. The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages most credit cards charge. You can take out a personal loan, pay off the balance of your outstanding credit cards and then make one payment to your new personal loan servicer.
Home Improvement and Repairs
If you own your home, you could take out a home equity loan to fix or make upgrades. But you can also take out a personal loan. Home equity loans and lines of credit are great for tackling home projects, but they’re secured and use your home as collateral.
If you don’t want to risk losing your home in case you fall behind on payments, a personal loan is a solid substitute. Along with that, it might be quicker to get a personal loan compared to a home equity loan.
Auto loans are available if you’re looking to buy or lease a car, but personal loans are also available. Auto loans tend to have lower interest rates compared to personal loans, but they are secured loans and use your vehicle as collateral. If you’re worried about missing payments and your car getting repossessed, a personal loan might be a better option for you.
We don’t recommend borrowing money to pay for a wedding. Instead, consider paring down your wants to fit your budget, rather than increase your budget to fit your wants.
But if you do need to borrow money, you have a few options, like credit cards and personal loans. Credit cards tend to have higher interest rates compared to personal loans. Taking out a cash advance on your credit card can have even higher interest rates and fees. A personal loan is a less expensive option for borrowing if you need the money to cover the cost of a wedding.