Top 5 Reasons to Get a Personal Loan
Personal loans can be used for almost any expense, including debt consolidation, home improvement projects, large purchases and emergencies. Personal loans may be advertised specific to their use — home improvement loans, travel loans or medical loans — but they function the same way.
The best way to use a personal loan is to reach a financial goal, such as consolidating high-interest debts or financing a home improvement project that adds value to your home. Compare personal loans with other financing options to find the one that best fits your plans and budget.
How do personal loans work?
A personal loan is a lump sum that you borrow and repay in fixed, monthly installments. Loan amounts can range from $1,000 to $100,000, with repayment terms from one to seven years. The cost of the loan, or annual percentage rate, is usually from 6% to 36%.
Unlike auto and home loans, most personal loans are unsecured, meaning they’re not backed by collateral like your car or house. The approval decision and rate are based on your credit, income and other debts.
5 reasons to consider a personal loan
Personal loans break up large expenses into smaller, easier-to-manage monthly payments over the course of a few years. The most common reasons for a personal loan include:
- Debt consolidation or refinancing
- Home improvement projects
- Medical bills
- Life events and discretionary expenses
- Emergencies
1. Debt consolidation or refinancing
If you carry multiple forms of debt, you can use a personal loan to consolidate it. A debt consolidation loan combines unsecured debts like credit cards and medical bills into one payment, ideally with a lower interest rate. This approach saves you money and can help you pay off the debt faster.
A similar reason to get a personal loan is to refinance an existing loan. It works the same way as a debt consolidation loan: If your credit and income have improved since you first got the loan, you can refinance it at a lower interest rate to save money and pay off the debt faster.
Consider whether the new loan comes with any fees, like an origination fee, that would offset your savings.
2. Home improvement projects
You can use a personal loan to fund a home improvement project, like a kitchen or bathroom remodel.
Unlike home equity financing, personal loans don’t require your home as collateral. Loans are usually funded within a week of approval and some lenders offer extended repayment terms for home improvement loans.
3. Medical bills
Personal loans can be used to cover medical, dental or other health care costs, like an emergency procedure, cosmetic work, costly out-of-network charges or a high deductible. Borrowers can also use a personal loan for fertility treatments like egg freezing or IVF.
4. Life events and discretionary expenses
Most financial experts don’t recommend using a personal loan for discretionary expenses, but some big-ticket life events may require outside financing.
For example, a wedding can cost more than $30,000, and not every couple can pay outright. Wedding loans are one way to cover the difference.
A big vacation can add up, too. Though fly now, pay later payment plans are becoming increasingly popular, traditional vacation loans are another option to cover a dream trip.
5. Emergencies
If your car breaks down or you need to fund an emergency, a personal loan can see you through. Look for small personal loans with monthly payments you can afford, and plan to repay your loan as soon as possible to avoid a cycle of debt.
Personal loans are typically a better choice than a payday or pawnshop loan, both of which can charge triple-digit interest rates.
What personal loans can’t be used for
Here are three expenses that personal loans usually can’t cover:
- A home down payment: FHA programs and most banks prohibit the use of personal loan proceeds for a down payment on a home. Taking out a personal loan also adds to your debt-to-income ratio, which may make it difficult to get favorable terms on a mortgage. Consider down payment assistance programs or a family loan instead.
- College tuition: Many personal loan lenders prohibit using their loans for educational expenses. Instead, public and private student loans are designed to help pay for college tuition. They have longer repayment periods, often at lower rates than personal loans.
- Starting a business: Some lenders prohibit using personal loans to start a business. If you are starting a business, consider a small-business loan from the SBA or another lender.
What to look for in a personal loan
Here are features to compare as you shop for the best personal loan.
Costs
Annual percentage rate: A loan’s APR represents its total cost, including the interest rate and additional fees. Use the APR to compare one loan with another or with other financing types, such as credit cards.
Monthly payment: Check the loan’s expected monthly payment against your budget to be sure there’s room for it. You can use a personal loan calculator to see what rate, loan amount and term will get you the most affordable monthly payments.
Fees: Many lenders charge late fees, and some may charge origination fees. An origination fee is included in your APR, but many lenders take it from the loan funds, effectively reducing your total loan amount.
A personal loan can be a versatile tool to help you achieve your financial goals—whether you're consolidating debt, managing an unexpected expense, or investing in a home project. If you're ready to take the next step, consider a Universal 1 Credit Union Signature Loan for competitive rates and terms that work for you. Apply for a Signature Loan with U1 today!
Source: Annie Millerbernd Assistant Assigning Editor, Kim Lowe Lead Assigning Editor "Top 5 Reasons to Get a Personal Loan", nerdwallet, Post Date: April 24, 2024, Date of Access October 7, 2024: https://www.nerdwallet.com/article/loans/personal-loans/ways-to-use-a-personal-loan
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