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!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|