You can use a personal loan for a wide variety of purposes, including debt consolidation and refinancing. However, lenders may have restrictions against things such as paying off student loans or buying a house. Here’s a look at some of the common ways to use personal loans.
Debt consolidation and refinancing
Many borrowers use personal loans to consolidate their debt or refinance an existing loan. They can be a great way to pay off debts with higher interest rates, like credit cards, potentially get a lower annual percentage rate (APR), and help pay off debt faster.
According to the Federal Reserve, the average interest rate on credit cards was 21.86%, compared to 12.33% for two-year personal loans from banks.
For example: Let’s say you have three credit cards, and each one has a $2,000 balance and a 20% APR. If you prequalify for a $6,000 loan with a 10% APR, you can use the loan to pay off all three cards.
After paying off the cards, you’ll have one fixed payment due each month instead of three, and be given a set term to pay off the debt. Paying off the $6,000 balance over a two-year term with the lower-APR personal loan, in this case, would also save you $684 more in interest than if you had paid it off over the same term on the credit cards.
Home renovations or repairs
Personal loans are also often positioned as home repair or renovation loans. While homeownership helps you build wealth with each mortgage payment, it also comes with hefty upkeep expenses.
For example, the average cost of a roof replacement is about $9,200, according to Angi, while new A/C units cost about $6,000. Personal loans can help you cover expensive repairs and home improvement projects like renovating a bathroom, kitchen, or basement.
Emergency expenses
An emergency personal loan can help you get quick access to funds for an unexpected expense. For example, if your pet gets sick or hurt and needs emergency vet care, it can cost anywhere from $150 to $250 dollars for an emergency X-ray and up to $5,000 or more for emergency surgery.
Medical bills, dental bills, funeral expenses, and auto repairs also can be expensive and pop up unexpectedly.
Big life events
Personal loans are commonly promoted as a way to expense big life events like engagements, weddings, moves, family reunions, and vacations. They can be helpful if you want or need to fund a life event before you’ve saved the full amount for it.
Good to know
Most lenders ask your reason for taking out a personal loan on your application and require you to use the funds solely for that purpose. Others may let you use the funds how you see fit, with only a few restrictions.
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What you can’t use a personal loan for
While personal loans are versatile, lenders tend to place a few restrictions on their use.
- College tuition and expenses: Lenders typically won’t allow you to borrow money to pay your tuition or use the money for educational expenses. Instead, a federal or private student loan is more suited for that purpose.
- Using funds to start a business: Similarly, you often can’t use a personal loan to start your own business. You can get a loan from the Small Business Administration or a lender who specializes in business loans to help with your business expenses.
- Making a down payment: Personal loans generally can’t be used for a down payment on a home. There are, however, down payment assistance programs available, such as grants and first-time homebuyer programs from state governments.
- Illegal activities: It should go without saying, but you can’t use personal loans for illegal activities, or things like gambling.
Acceptable loan uses can vary, so you’ll want to check a lender’s restrictions before accepting a loan.
Learn More: What Can't You Use a Personal Loan For?
How to compare personal loans
A wide range of companies offer personal loans that can vary greatly in terms of size, term length, cost, and more. Here are the main factors to consider:
- APR: Your APR indicates the total cost of the loan per year and accounts for the interest rate and upfront fees, like origination or administrative fees, which can be anywhere from 0% to 12%, depending on your credit.
- Loan amount: A lender’s general maximum loan limit won’t be available to every borrower, but typical loan amounts range from $600 to $50,000, though some lenders will lend up to $100,000 or $200,000.
- Loan term: Lenders vary in the amount of time they’ll give you to repay a loan. Typical terms range from 1 to 7 years, but longer terms may be available for certain purposes, like home improvement loans. Shorter terms lower your overall interest costs, but result in higher monthly payments.
- Customer satisfaction: Read reviews from past borrowers to learn how satisfied they are with their loan experiences. Look for patterns in the reviews, whether positive or negative.
- Funding time: If you’re in a hurry, a lender’s funding time will be important. Some lenders can fund as soon as the same or next business day, but generally expect it to take up to a week, depending on the lender.
By reviewing personal loan quotes according to these factors, you can figure out which lender will be a good fit for your situation.
Learn More: How To Compare Personal Loans
How to apply for a personal loan
Here’s how the process typically works:
- Check your credit: Before applying for any loan, check your credit reports and scores. Make sure all of the information is correct and look for opportunities to make quick improvements. Most lenders prefer a credit score of 670 or more, but if your credit is less than ideal, there are lenders who specialize in bad-credit loans.
- See if you prequalify: Most personal loan lenders let you check if you’re prequalified for a loan. Collect quotes from various lenders to get an idea of the rates and terms available to you. Note that even if you prequalify, it is not a guarantee of an offer of credit. You’ll still need to submit an application. Additionally, your final rate could be different than what you were quoted in the prequalification process.
- Compare quotes: Once you have a few quotes, compare them to see which will be the best fit. Consider factors such as loan amounts, APRs, monthly payment amounts, terms, and funding times.
- Submit an application: If you receive a quote that suits your needs and budget, notify the lender that you want to move forward. The full application process can vary, but lenders will at this point conduct a hard credit inquiry, which may ding your credit score temporarily. The lender will often request documents such as pay stubs, bank statements, and a government-issued ID.
- Get your funds and begin repayment: Upon final approval, you’ll sign the loan documents and the lender will send the loan funds to your bank account. Your first payment will typically come due the following month.
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