When to Use a Personal Loan (and When to Avoid It)

what is a personal loan used for

Debt isn’t something you should welcome into your financial life, but sometimes it is necessary. Unless you’re a massive saver or come into family money, it’s hard to go to school, own a home, or pay for big emergencies without some line of credit tethering you to a bank.

But if you’re wary of new debt, what do you do when you need a more flexible stream of cash for emergencies or expenses? That’s where a personal loan can give you the added benefit of cash on hand without charging you the hefty fees and interest rates of a credit card.

What is a personal loan used for?

Learn how a personal loan can be used responsibly — and when one will likely only dig you further into debt.

1. Paying for school

Student loans are one of the most utilized forms of credit out there today, which means more and more student debt for the masses. Student loans are popular because they often come at such a low interest rate, but what can you use a personal loan for at school?

While student loans typically cover tuition, a personal loan can help you afford housing, textbooks, and basically everything else a student loan can’t (or won’t) cover. The lower interest rates on these loans help payments stay more manageable than using a traditional credit card to cover these costs, and can save you money in the long run.

2. Starting a business

Maybe you’ve already graduated and are ready to start your own business. A personal loan can help pay for necessary new business costs like permits, materials, staffing, equipment, office space, and other business expenses while you’re still in the pre-revenue stage.

Using a personal loan for your business can keep you from having to dip into your personal savings (which you likely need to live off of at this time) and from liquidating other assets to keep the business afloat.

3. Paying off other debt

You read that right — in some instances, getting a personal loan can actually help your financial situation. For example, if you have high-interest credit card debt, paying it off with a personal loan could make sense, as long as your personal loan has a lower interest rate than your original debt.

Alternatively, you can use a personal loan to consolidate multiple debts into a single monthly payment with one set interest rate. By simplifying the payment process, you can avoid late fees or overdraft charges (in addition to saving you the headache of keeping your payment schedules straight!).

Learn more about using personal loans to pay off other debt here.

4. Home renovations and maintenance

With the summer heat in full effect, your HVAC system is probably working extra hard. But what would you do if it stopped working? With repair costs that are typically in the thousands, could you afford to replace your whole system?

Home emergencies are what you would typically expect to use an emergency fund for. But with 63 percent of Americans unable to cover even a small $500 emergency, it’s more likely that you’d be left high and dry — and hot.

In circumstances like this, a personal loan can be used for keeping more of your emergency savings in the bank. Instead of emptying your emergency fund and scrambling to save again, you can instead make a lower payment each month. You can also utilize personal loans to invest in improvements and upgrades around your home, particularly if you’re looking to sell in the future.

5. Personal emergencies

Much like home emergencies, personal emergencies often require having large amounts of available cash, quickly. You shouldn’t have to walk out of a hospital because you can’t afford it. Medical debt affects the credit and finances of almost 43 million Americans, and we can’t expect John Oliver to forgive all of it.

When you encounter hospital bills, car trouble, a job loss, or the funeral costs for a family member, the last thing you want to do is stress out about money. In serious, unavoidable emergencies, a personal loan is most likely a better option than using a higher-interest credit card (and is always preferable to a predatory payday loan).

When not to use a personal loan

Though some situations warrant personal loans, there are several not-so-savvy ways to use this form of credit, too. Using personal loan funds on expenses like a wedding or a luxurious vacation can lead to bigger debt problems down the road.

Emergencies happen and are unavoidable, even though paying for them can feel like a burden. But a good rule of thumb when considering when to use a personal loan is to ask yourself “Is this something I would still want to pay for a year from now?”

You would not want to be paying off last year’s vacation when you’re trying to plan your next. And though you might think that splurging on a wedding is the norm, spending extravagantly outside of your price range for your big day can lead to buyer’s remorse. Same with making pricey upgrades on a home when you may not see a full return on your investment.

When it comes down to it, personal loans can be a great tool for those looking for a way to make paying for necessary expenses more manageable. Don’t be afraid to ask your financial advisor or personal banker for more information about whether a personal loan is right for you.

And remember, just because money is available doesn’t mean that you’re obligated to use it. Borrow only what you need, spend wisely, and keep in mind your monthly payment in addition to your other bills and debt obligations (like student loans or your mortgage.)

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.