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

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what is a personal loan used for
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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?

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. 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 to help you understand what you are buying. Be sure to consult with 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.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. 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 to help you understand what you are buying. Be sure to consult with 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.

RATES (APR)loan amount
5.99% – 17.88%1 $5,000 to $100,000
5.69% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 17.88% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 4, 2019 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. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 3.08% 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. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. 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 Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

Direct Deposit required for payroll.

Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5.  

    Rates and terms vary by state.

3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** 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.

Published in Credit & Debt, Loans

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