Personal Loans to Pay Bills

Struggling to pay your bills can be stressful, so personal loans—funds you can borrow for almost any purpose—may seem to offer a way out.  

It’s true that you can use personal loans to pay bills. If you’re in danger of losing your shelter, it’s a better solution than taking out a payday loan. But in most cases, we don’t recommend using personal loans to pay bills. We’ll show you why and explore better alternatives. 

Can you take out loans to pay bills?

If you’re struggling to make ends meet, you might be able to use loans to pay bills, depending on the type of loans you’re considering. You couldn’t use an auto loan or mortgage for your bills, for example—they’re for cars and homes—but more flexible loan types can allow this.

Many people use payday loans to pay bills. It’s what they’re designed for: small, short-term loans to cover everyday expenses until your next payday, all without a credit check. But payday loans can be predatory because they’re generally expensive and could be designed to keep you in debt. 

Credit cards are a common way for people to make ends meet, but it’s also easy to get stuck in debt. If you’re a homeowner, you may be able to use a home equity loan or line of credit to borrow money at a more affordable rate, but if you default, you could lose your home.

If you’re looking for loans to pay bills, a personal loan might be your best option. You can use these loans for almost anything, including ongoing expenses. They’re cheaper than credit cards and don’t put your home at risk of foreclosure. But you can still face risks using a personal loan for bills. 

What our expert recommends

Erin Kinkade

CFP®

For those who find themselves in financial difficulties due to overspending or giving away their money, I suggest a couple of steps first. One, identify how you arrived in this situation and work on strategies to avoid being in the same position again by engaging an investment counselor or therapist. Then consider no-cost borrowing options, such as asking trusted family and friends. After that, consider personal loans, home equity loans or lines of credit, borrowing from your retirement account, or using a credit card. A payday loan should be a last resort.

Why we don’t recommend personal loans to pay bills

If you’re behind on your bills and in danger of losing your housing, heating, or other necessary utilities, consider taking out a personal loan to keep you and your family safe. But if you have options, we don’t recommend borrowing to pay your bills. Here’s why: 

Small personal loans are harder to find

You can find lenders willing to offer personal loans as small as a few hundred dollars, but most lenders won’t work with you unless you borrow several thousand dollars because personal loans are meant for large, infrequent expenses.

It’s a short-term fix for a long-term problem

Personal finance has few rigid rules, but a major one is that your ongoing regular expenses should be less than your monthly income. If you need to borrow money to cover bills you know are coming each month, it might be a sign that you need to work on budgeting and saving. 

It makes it harder to get ahead

Another reason we don’t recommend using a short-term fix for a long-term problem is that will make it more difficult to repay your debt later. You’re taking away from your future income to pay for expenses now, so you’ll have less money to work with going forward.

This is why people who use payday loans often end up getting trapped in a debt cycle. When it comes time to make a payment, you’ll have less money than before—and you were already having trouble making ends meet. 

Unless you’re certain your situation will improve—for instance, you’re expecting a windfall of cash or have secured a new job—it’s unlikely you’ll be in a better position when it’s time to make your next payment.   

It lowers your financial resilience

It’s wise to keep your options open when it comes to borrowing money because you never know when the next emergency will happen. Your beloved pet could get sick, and if you’re already all tapped out on your ability to borrow, you may have fewer options. 

If you’re taking out loans to pay bills, you might already be stressed about making your ongoing payments. But now, you’re adding another bill to the mix. This is dangerous because you may be more likely to default, which comes with a whole host of consequences. 

You might have better options

Using personal loans to pay bills can seem like a terrific idea because you don’t need to talk to the companies you owe money to and admit you can’t make your payment. But in most cases, better options are available, even at no cost. They’re just not as well advertised. We’ll cover those further below. 

It makes your bills more expensive

Taking out loans to pay bills makes them more expensive because you’ll pay financing charges. It’s like an anti-discount, and who wants that?

How much more will a bill cost if you use a loan to pay for it?

You already know borrowing money isn’t free and that taking out a loan will cost you. But it helps to see just how much it increases the cost of bills you’d normally pay from your bank account. 

In 2022, the average family spent $379 each month on utilities such as electricity, water, and phone service. If you can’t count on your income this month and want to use a loan to pay these bills, your first challenge is finding a lender willing to offer such a small personal loan. 

But assuming you can, here’s what your personal loan might look like:

• Loan amount: $379
• Term length: 6 months
• Interest rate: 15%
• Origination fee: 5%
• Monthly payment: $66
• Total interest and fees: $36 

In this example, you’re trading a $379 bill due today for an obligation to pay $66 for the next six months instead (and that’s on top of that same bill due again next month). You’ll also pay $36 in financing charges. 

The financing charges might not sound like much until you consider they are like an additional 10% fee for something that would be free to pay in full today. A personal loan calculator can help you run these numbers for yourself.

Alternatives to taking out a loan for bills

Harping on why we don’t recommend taking out loans to pay bills isn’t too helpful unless we can show you better options. Keep reading because we’ve found five.

Reach out to your creditors

It sounds scary, but a smart first step is to contact your bill companies to explain your situation and ask whether they have assistance options, such as a payment plan or community care fund. 

This may be easier with necessary utilities, such as electricity and internet, but other creditors may offer them too. Helping out customers is in their best financial interest because debt collection is expensive. 

Borrow from family and friends

If you have friends or family with the financial means to help out, consider asking them for support. You can even draft up a written and signed agreement to help set expectations and let them know you’re serious about paying them back. 

Payday alternative loans (PALs)

Many credit unions offer payday alternative loans to people who have been members for at least one month. You may be able to borrow up to $1,000, which you can repay over the course of one to six months at an affordable cost.

Credit counseling

Credit counseling agencies are nonprofit organizations that offer free or affordable help to people having trouble with their finances. You’ll start with a free intake session, during which a counselor reviews your finances with you and helps you develop a plan to fix your challenges.

In some cases, you may be offered a debt management plan to help pay back your debt. This is different from debt settlement, which is expensive and can have many unintended consequences. These plans are affordable, and most other assistance is free. 

Financial assistance

Depending on your circumstances, you may be able to take advantage of certain financial assistance programs to help you pay your bills or at least free up money in other places that you can use to pay bills. 

For example, healthcare providers often offer charity assistance or interest-free payment plans to pay medical bills. Applying for the Supplemental Nutrition Assistance Program (SNAP) may help you free up money to pay your rent. If you’re not sure where to start, call or visit 211.org to get help from a local community navigator.