Personal loans can be used for almost any purpose. Lower interest rates than credit cards are a popular option for debt settlement.
It also offers predictable monthly payments to lend you large amounts of expenses and quick emergency funds. Knowing the top nine reasons for personal loans can help you decide whether you will benefit from applying for it.
9 Reasons for Personal Loans
Fixed fees and stable monthly payments on personal loans can be more budget-friendly than other types of debt. If you are facing unexpected costs that you need to pay right away, quick funding is also a plus.
Before you buy a personal loan, consider these nine reasons. That might be perfect for you. Be sure to weigh the pros and cons of a personal loan before making a final decision.
1. Debt settlement
Debt settlement is one of the best reasons to take away your personal loan. The average personal loan interest rate is just above 12% (compared to the average credit card fee of 21%), which saves hundreds or even thousands of dollars.
A personal loan will help you save money. Personal loan fees are fixed, making payments predictable compared to various credit card fees. There are also clear payment dates as personal loans are paid in equal installments and terms are usually paid in the range of 1 to 7 years.
Debt integration also simplifies debt management. Instead of making payments on multiple other loans, combine them into one loan and one monthly payment.
2. Home Improvement Project
Homeowners who do not want to borrow against their home capital can use personal loans to improve their home. It is also suitable for borrowers who do not have enough shares to acquire a Home Equity Credit Line (HELOC) or Home Equity Loan.
Unlike home equity products, personal loans usually don’t need to use your home as collateral. The poor personal loan options are available to borrowers with a score below the minimum standard of 620 set by most home equity lenders.
Personal loan financing times are usually less paperwork cumbersome than home equity financing and are a better way to fund small renovations and repairs. Although repayment terms are shorter, interest rates for borrowers with good credit home improvements can be as low as home equity loans.
3. Emergency costs
Borrowers often resort to personal loans to pay for emergencies. Some lenders provide same-day funding if you apply early enough on a weekday.
It could be a good match for a surprising medical bill like deductible for emergency care. If you’re stuck with expensive auto repair bills, your normal turnover time can reach the road without draining your savings account.
Emergency personal loans are much faster than financing your home equity in the event of a household crisis, such as a burst water pipe or a roof leak. The approval process is much faster as the loan is not secured by your home.
You can choose to split the costs of your emergency fees between your personal loan and your emergency savings account. Knowing that you still have cash in your account, you may sleep better, and you will have a lower personal loan balance to pay off.
4. Vehicle funding
Personal loans may be a good alternative to secured funding to buy a car, boat or RV. You can avoid high-pressure sales pitches from dealer finance companies and usually get prequalified in seconds. You can also choose similar terms to your car lender, ranging from 1 to 7 years.
Loans are not approved based on the price of the car, so you can borrow additional fees for extra payments such as road hazard kits, boat storage fees, and maintenance fees. However, be aware that the more you borrow, the higher your monthly payments and total interest fees.
Additionally, personal loans are unsecured, so if you can’t repay the loan, your vehicle will not be at risk of foreclosure. If you need to sell your vehicle quickly, you don’t need to deal with the documents that will involve paying off your car loan.
5. Payday loan replacement
Using a personal loan instead of a payday loan will save you hundreds of dollars on interest charges if you need additional cash before your next paycheck. Personal loans also typically range from 12 to 84 months, with more time to pay off your balance.
Payday loans typically have short repayment conditions by the next payday or between two and four weeks. This quick turnaround time often forces the borrower to renew the loan if the lender cannot pay it off by the due date.
The annual payday loan rate (APR) can reach 400% depending on the state. However, the maximum interest rate for personal loans is usually around 36%. You can see how the two people are compared by using a personal loan calculator to see the difference in interest costs.
6. Travel cost
According to Angi, local travel costs average between $883 and $2,563, while long-distance travel costs between $2,700 and $10,000. If you don’t have cash, a personal loan may be a cost-effective way to fund your travel expenses.
Personal loan funds can pay for the cost of mobile trucks, new furniture, cross-country vehicles, and mobile supplies. If you use a personal loan for travel expenses, you may be floating while waiting for your first paycheck after the job transfer.
This way you can maintain your savings for potential utility deposits, replenishing your grocery inventory, or for new home cleaning supplies.
7. Large purchases
If you need to pay thousands of dollars for items like a washer or dryer, four new tires in your SUV, or a new laptop for work or school, it’s worth considering a personal loan. You will need to pay interest and potential fees, but you can avoid running out of savings and using a credit card.
You can also make several large purchases at a time and budget on a single fixed-rate personal loan. For example, you can use a personal loan to replace multiple kitchen appliances during a remodel.
8. Wedding costs
According to Zola, the average couple spends around $33,000 on their 2024 wedding. If you haven’t saved that kind of cash, you can choose a personal loan to provide funds to cover your expenses now and pay them back later.
Personal loans can be used to pay for wedding costs for large tickets such as venues and bride dresses, or for less costs such as flowers, photos, cakes, and wedding coordinators.
But remember that a gorgeous wedding is not necessary, it’s a desire. Don’t let the perfect day vision drive you to borrow more than you can afford to pay. Make sure you’re talking about money and marriage before the big day.
9. Vacation costs
According to a budget survey, the average cost of a weekly holiday is up to $2,268, according to travel budgets. Personal loans will fund your honeymoon and then go on a trip to Europe after graduating or celebrating a special anniversary holiday.
However, it is generally recommended to use a leave loan. This type of debt can be budgeted for years after the holidays.
When to get a personal loan
When approving a personal loan, lenders will take into account factors such as their credit score, annual income, and credit history. If you are strong in these categories, you are more likely to be able to process your personal loans and get a better rate.
Personal loans can be a good tool to fund your next purchase, project, or life event if you meet the following criteria:
- You have a very good credit score. According to the FICO Credit Model (scoring used by most lenders), a very good score is above 740. Lenders may accept lower scores, but fair to bad credit rates can easily be implemented in the 20% or 30% range. Combined with shorter conditions, payments may be meaningless to your budget.
- There is an established repayment history. Payment history is especially important as most personal loans are unsecured. Your credit report includes all reported payments you have made, missed, or late over the past seven years. If your credit history is short or poor, your lender may reject your application, offer a higher fee, or reduce the amount they lend you.
- The debt-to-income ratio is low. Your debt income (DTI) ratio is the percentage of monthly debt payments divided by your total monthly income. Lenders often consider a higher DTI as a red flag and may not be able to process payments with a new loan. They can charge a higher interest rate or reduce the amount they can borrow if their DTI is too high.
- Your annual income is It’s stable. Some agencies require a minimum income for approval, but in most cases, evidence of a stable income and employment history is required. Salary and full-time hourly income can lead to faster and easier approvals. Generally, the higher your income, the more likely you are to be approved.
Choose a lender who offers prequalifications. Prequalification allows you to see forecast rates and approval odds before applying. Prequalification will not affect your credit. This is especially important considering the rates range from just under 7% to over 35%. Even if your score drops slightly due to rigorous investigations, you can still push you to offer higher personal loan interest rates.
If you are not using a personal loan
Personal loans are a useful tool to finance larger or unexpected costs, but there are situations where a personal loan alternative is better.
- Your credit score is poor. The lower your credit score, the higher your interest rate. If you have insufficient credit and you really need a loan, shop with a lender who specializes in bad credit loans.
- Can’t afford to pay monthly loans. Evaluate your spending plan, look at your debt habits honestly and decide if you can afford to pay on a loan. If your monthly budget is tight, or if you can barely afford to pay the minimum credit card payment, your personal loan may not be of any use. Defaulting on personal loans can have serious consequences you want to avoid.
- You can qualify for better funding options. Personal loans may also not make sense if they are used for purchases that qualify for better loan types. Automobiles, students, and mortgages often have lower or longer terms and more affordable payments.
Conclusion
Personal loans offer the flexibility to fund small costs or critical projects with little qualifying documents. Also, in most cases, money is available within the business day of approval, which is useful for cash crunches.
Additional perks: Most personal loans are unsecured, so you don’t have to risk losing your home or car. Personal loans are worth considering if you receive a consistent salary and have the budget for payments set up over the next few years.
