What Can a Personal Loan Be Used For?
A personal loan can be used for almost anything a borrower wants them to be. Lenders place few restrictions on personal loans making them an attractive option for people looking to pay off debt or accomplish other financial goals.
Personal loans are a versatile financial tool that let you get your hands on money you can use to do almost anything you’d like.
When you take out a personal loan, you complete an application with a bank, credit union, or online lender. If approved, you’re able to borrow a sum of money you pay back over a set time period. You’ll pay interest — charged at either a fixed or variable rate — and can use the funds for almost anything you want.
Personal loans are different from other kinds of loans you take out, such as a mortgage loan or auto loan, which are secured loans. When you borrow for a home or car, the house or vehicle acts as collateral and the lender can seize them if you fail to make payments.
Most personal loans, on the other hand, are unsecured. The lender has just your promise to pay, which is why potential lenders check your credit score and want proof of income before they will give you a personal loan.
Once you’re approved, you can use the funds from the personal loan as you see fit without letting the lender know where the money is going. Because personal loans can be used for so many different things, taking out personal loans can be a smart choice when you have financial needs.
What Are the Top Reasons People Use Personal Loans?
Because personal loans are so versatile, borrowers take out these types of loans for many different reasons. However, if you are still asking yourself what are personal loans used for, then here are nine of the most common reasons people obtain a personal loan.
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To Pay Off Higher Interest Debt
Personal loans typically have a lower interest rate than credit card debt. If you have a lot of existing credit card debt, you could use a personal loan to pay off what you owe.
>> Read More: Personal Loan to Pay Off Credit Card Debt
Not only could this potentially lower your interest costs and save you money, but it could also make debt repayment much simpler if you’re able to pay off many credit cards with a single personal loan. You would just have one monthly payment to make then, instead of having multiple payment plans with multiple creditors.
To Cover Medical Expenses
Landing in the hospital or coping with an unexpected illness can be extremely expensive — especially as deductibles on health insurance plans have risen dramatically in recent years. For those who have a hard time affording medical bills, a personal loan could be the solution. A personal loan could allow you to get the treatment you need without delay and pay off your medical expenses over time.
>> Read More: Can You Use a Personal Loan to Pay for Medical Expenses?
To Respond to an Emergency
Emergencies happen far too often, and unfortunately, many people don’t have an emergency fund, so they’re unprepared to respond when they have a sudden need for cash. While you could put your emergency costs on a credit card, getting a personal loan instead can be much less costly.
Plus, instead of having credit card debt that could take years to repay if you only pay the minimum, your personal loan will be repaid on a set schedule in accordance with the terms you set with your lender. Many personal loans have three- to five-year repayment terms, so you will know exactly how long it will take to become debt free.
There are many personal loan lenders that have a fast application process and make funds available quickly, so don’t assume that it will take you too long to get access to cash from a personal loan when an emergency strikes.
>> Read More: Should You Use a Personal Loan in an Emergency?
To Make Home Improvements
You may need to upgrade your home or make home repairs — which can be a problem if you don’t have the cash available to pay for a costly remodel.
You could take out a home equity loan or home equity line of credit, which tend to have lower annual percentage rates than personal loans do. The interest on a home equity loan or line of credit could also be tax deductible, provided you’re using the proceeds from the loan for home improvements. But, when you borrow against your home using these types of loans, you put your house at risk, unlike with a personal loan that’s not secured by your home.
You may decide you don’t want to incur the costs of obtaining a home equity loan or home equity line of credit — which can include paying for a home appraisal and closing costs on the loan — so getting a personal loan may make more sense for you.
>> Read More: Best Home Improvement Loans
To Cover the Costs of Funeral Expenses
Sadly, funerals can be very costly, and many people do not have the money to pay for them. The last thing you want to worry about after a loved one’s death is how to cover the costs of a dignified burial. A personal loan could provide you with the funds that you need to pay for funeral expenses as well as associated costs, such as a cemetery plot.
>> Read More: What to Consider With Funeral Loans
To Fix or Maintain a Vehicle
When you need your car to get to work or fulfill family obligations, you cannot afford to be without it. Unfortunately, car maintenance and repairs can be costly. And, if you wait to make fixes, problems typically become worse. Taking out a personal loan to help you get your car back on the road could be a wise decision, especially if you wouldn’t otherwise be able to make the repairs you need so you continue to have transportation.
To Cover Moving Costs
Moving locations can help you to cut your housing costs so you can have more room in your budget, can allow you to find a better space for your family, or can enable you to take advantage of new career opportunities.
Unfortunately, moving can sometimes be very expensive. A long-distance move can cost many thousands of dollars, but even local moves are often more costly than most people realize.
When you need to relocate and are worried about how to pay the bills for your move, a personal loan could provide the funds you require.
>> Read More: Can You Cover Moving Expenses With Relocation Loans?
To Take a Vacation
Taking out a personal loan to pay for a vacation is usually not the best financial choice because you’re paying interest for something that isn’t really necessary. Still, it’s often more financially responsible to use a personal loan to fund a vacation than to use a credit card that has a higher interest rate.
If you have to borrow for a vacation because you’ll otherwise miss something important, such as a family member’s wedding, consider looking into personal loan options. Many lenders offer personal loan amounts as low as $1,000, so you won’t have to borrow more than necessary.
Try to keep your loan balance as low as possible and, if you can postpone the vacation until you’re able to pay in cash, consider doing so.
>> Read More: Personal Loans for Vacation
To Pay for a Wedding
Weddings cost a fortune, and you may need to come up with the cash to pay for your special day. If you do, a personal loan can be an affordable solution to cover wedding expenses. Just as with vacations, though, you should try to borrow the minimum possible, because you don’t want to start your married life off with a lot of debt.
>> Read More: Wedding Loans
What You Can’t Use a Personal Loan For
Although you can use a personal loan for almost anything you want, most lenders do have some restrictions and may ask you in your loan application what you plan to use the money for to ensure you won’t use it for a prohibited reason.
Some of the things lenders typically forbid you from using personal loans to do include:
- Paying for college tuition: Lenders don’t usually want to lend to students seeking to pay for their education because personal loans don’t have all of the lender protections student loans do. Student loans are almost never able to be discharged in bankruptcy, which is important to lenders because students with no income could get deeply into educational debt and just not pay their loans. Personal loans are dischargeable, so lenders have generally decided that issuing personal loans to be used to cover tuition is too risky.
- Illegal activities: You can’t borrow funds from a personal loan to use in illegal ventures. If you wanted to set up a business producing illegal narcotics, you can’t use a personal loan as your startup capital.
- Gambling: You cannot take out a personal loan to use the funds at a casino or in other games of chance.
Taking out a personal loan makes a lot of sense if you need to borrow and want a loan with a reasonable interest rate. Just be sure not to borrow more than you can afford to pay back and make payments on time, and be sure to compare offers from the best personal loan companies so you can feel confident you’re getting the best personal loan for your situation. Your personal loan should help you to build credit while also accomplishing important financial goals.
Author: Christy Rakoczy
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