The Top 9 Reasons To Get A Personal Loan | Bankrate (2024)

Personal loans are a type of installment debt that can be used for just about any purpose. With lower interest rates than credit cards, they’re a popular choice for debt consolidation.

Borrowers may also find personal loans useful for fast cash to cover an unexpected car repair, medical bill or purchase they don’t have the savings to pay for. They’re a cheaper alternative to payday loans and they provide a predictable monthly payment to finance a large home improvement.

Knowing the top nine reasons for personal loans can help you decide if you’d benefit from applying for one.

9 reasons to get a personal loan

Having a fixed rate and stable monthly payment make it easier to fit a personal loan payment into your budget. Quick funding is also a plus if you’re facing an unexpected expense. You may be able to accomplish more financial goals than you realize with a personal loan.

1. Debt consolidation

Debt consolidation is one of the most common reasons for taking out a personal loan. You can potentially save hundreds or even thousands of dollars on interest payments. The average personal loan has an interest rate of just below 12 percent, while credit cards carry an average interest rate of nearly 21 percent.

Personal loan rates are fixed, making your payment predictable compared to variable credit card rates. You also have a definite pay off date because personal loans are paid in equal installments, with terms typically ranging between one and seven years. The fixed term and lower interest are what can end up saving you money.

When you apply for a loan and use it to pay off multiple other loans or credit cards, you’re also combining all of those outstanding balances into one monthly payment. Another big perk: Paying off revolving credit card debt can give your credit scores a big boost because it lowers your credit utilization ratio.

2. Home improvement projects

Homeowners can benefit from choosing a personal loan for home improvements if they don’t want to borrow against their home’s equity. It’s also a good fit for borrowers that don’t have enough equity to get a home equity line of credit (HELOC) or home equity loan.

Unlike home equity products, personal loans often don’t require you to use your home as collateral since they’re unsecured in many cases. Bad credit personal loan options are also available for borrowers with scores below the 620 minimum standard set by most home equity lenders.

Personal loan funding turn times are usually quicker with less paperwork hassle than home equity financing, making them a better way to finance small renovations or repairs.

3. Emergency expenses

Borrowers often turn to a personal loan to pay for emergencies like surprise medical bills, expensive car repairs or a household crisis like a burst water pipe. Funds from an emergency loan can be in your bank account within one business day in some cases.

Depending on your situation, it may make sense to split the cost of an emergency expense between a personal loan and your emergency savings account. You may sleep better knowing you still have some cash in the account and will have a smaller personal loan balance to pay off.

4. Vehicle financing

You can get a personal loan for a car, boat or RV. You’ll avoid the high pressure sales pitches from dealership financing companies and can usually prequalify in seconds. Unlike an auto loan, no down payment is required and you can borrow more than the price of the car to cover the cost of extras like road hazard kits, boat storage and maintenance fees or extra bells and whistles on your RV.

Additionally, since personal loans are unsecured, the vehicle wouldn’t serve as collateral so it wouldn’t be at risk of repossession if you can’t repay the loan. If you have to sell the vehicle quickly, you won’t have to deal with the paperwork involved in paying off an auto loan.

5. Alternative to payday loans

Using a personal loan instead of a payday loan may save you hundreds of dollars on interest charges if you need some extra cash before your next paycheck. The maximum interest rate on a personal loan is typically about 36 percent. The average APR for a payday loan can be more than 600 percent, depending on your state. You can see how the two compare by using a personal loan calculator to see the difference in interest costs.

Personal loans also give you more time to repay the balance, with terms generally ranging from 12 to 84 months. Payday loans have short repayment terms, usually by your next payday or between two and four weeks. This quick turnaround time often forces borrowers to renew the loan if they can’t repay it by the due date.

6. Moving costs

The average cost of a local move is between $882 and $2,544, while a long-distance move costs anywhere from $2,700 to $10,000, according to Angi. If you don’t have that kind of cash on hand, a personal loan may be a cost-effective way to finance moving expenses.

Personal loan funds can pay for moving truck costs, new furniture, cross-country vehicle transportation and moving supplies. Using a personal loan for moving costs can also help you stay afloat if you’re waiting to receive your first paycheck from a job relocation.

This way you can keep your savings for potential utility deposits, grocery stock ups or cleaning supplies for your new home.

7. Large purchases

If you need several thousand dollars to pay for items like a washer and dryer, four new tires on your SUV or a new laptop for work or school, a personal loan may be worth considering. Though you’ll have to pay interest and potentially upfront fees, you can avoid depleting your savings or racking up credit card debt to make the purchases.

Because personal loans don’t limit what you use the funds for, you can make several large purchases at once and budget for them with one fixed-rate personal loan payment.

8. Wedding expenses

The average couple will spend around $33,000 on their wedding in 2024, according to Zola. For those who don’t have that kind of cash saved up, choosing the right personal loan can allow them to cover the costs now and repay them later.

A personal loan can be used to pay for big-ticket wedding costs like the venue and bride’s dress, or for smaller expenses like flowers, photography, the cake or a wedding coordinator. If you don’t want to deplete your savings account or don’t have family helping you with the costs, consider a personal loan to help make your engagement and wedding exactly the way you always dreamed it to be.

9. Vacation costs

According to a study by Budget Your Trip, the average cost of a vacation is up to $1,984 for one person, which may be hard to save up for with inflation still at decade highs. A personal loan may give you the funds to splurge on a honeymoon, go on a trip to Europe after you graduate or celebrate a special anniversary getaway, if you’re okay paying it off several years after the vacation is over.

When not to use a personal loan

While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option:

• Your credit score is on the lower end. The lower your credit score, the higher your interest rate could be. If you have poor credit, shop around for lenders that specialize in bad-credit loans.
• You can’t afford the monthly loan payments. Assess your spending plan and take an honest look at your debt habits to determine how much you can afford to pay on a loan. If you’re on a tight monthly budget, or can barely afford the minimum payments on your credit cards, a personal loan may not help. Defaulting on a personal loan can have serious consequences that you’ll want to avoid.
• You can qualify for better financing options. A personal loan also may not make sense if it’s being used for a purchase that would qualify for a better loan type. Auto, student and mortgage loans often come with lower rates or longer terms and more affordable payments.

Compare pros and cons of personal loans before applying.

Personal loan alternatives

A personal loan locks you into a monthly payment that may last for several years. It may not always be the best choice for your financial situation. But there are alternative options available when you need money to cover a significant expense or purchase.

Credit cards

If you’re disciplined with your credit use, you can potentially avoid interest all together if you pay your credit card balance in full each month. However, if you carry a balance from one month to the next, you may pay steeper interest rates than you would with a personal loan.

If you make the minimum payment, it could take much longer to pay your credit card balance off when compared to a personal loan. And you may be tempted to use and reuse the balance, keeping you in a cycle of debt.

Home equity line of credit

If you expect to have ongoing expenses, perhaps for a remodeling project or ongoing medical bills, a HELOC may be an option to consider. HELOCs typically come with a 10-year draw period, which provides ample time to cover ongoing expenses.

You can use the credit and pay it off as needed, and your payment is only based on the amount you charge. Many HELOCs also offer interest-only payments during the draw period.

Home equity loan

If you have enough equity in your home, a home equity loan may be another option. Like personal loans, you receive a lump sum of money that’s paid back in equal installments.

Home equity loan interest rates are typically lower than those offered on personal loans and the funds can be used for anything you want. You can also choose terms as long as 30 years.

401k loan

Taking out a 401k loan can be a low-cost way to borrow money. You don’t have to qualify based on credit, and funds are usually available within a matter of weeks once you request one. Your employer may set rules on when and how much you can borrow, and you could be taxed on the loan if you leave your job or can’t repay the balance.

Personal line of credit

In cases where you’re unsure exactly how much money you will need, a personal line of credit can be a good choice. Like a HELOC or a credit card, you can borrow and pay off the account as needed.