The best reasons for a personal loan

A personal loan can be an effective way to streamline your budget or access funds quickly. With interest rates often lower than credit cards and the ability to cover expenses like home improvements, major life events, or emergency situations, a personal loan can save you money while helping you achieve your financial goals. Many lenders even offer same-day funding, making personal loans a convenient option when you urgently need the money.

However, it’s important to carefully consider how you plan to use the loan and whether it makes sense with your long-term financial strategy. Let’s explore the best reasons to take out a personal loan, the expenses you should avoid using one for, and the situations where getting a loan may not be the smartest choice.

How do personal loans work?

A personal loan is money that financial institutions such as online lenders, traditional banks, and credit unions offer for various purposes. These loans must be paid back in full and are usually unsecured, meaning you don’t have to offer any collateral to qualify.

Approved borrowers receive their loan amount in a lump sum and will immediately begin making monthly payments (or installments) to the lender. The rates and terms associated with personal loans differ based on the applicant. Your loan document will show your repayment plan, or how long you have to repay the loan (typically, the number of months or years), the interest or annual percentage rate (APR), and the monthly payment amount.

Depending on the lender, you could also pay an origination fee. Calculated as a percentage of the total loan amount, this fee is what lenders charge to process and approve your loan.

6 good reasons for a personal loan

Personal loans offer flexibility and can be used for various purposes as long as the expenses aren’t prohibited by your loan agreement. While you’re generally not restricted in how you use the funds, here are some of the most practical and beneficial reasons to consider taking out a personal loan.

1. Eliminating credit card debt

Debt consolidation is one of the top reasons people get a personal loan. Borrowers can pay off their high-interest debts (like credit cards) by combining several debts into one fixed-rate monthly payment. Consolidating debt can save you a significant amount of money, especially if you can get a lower interest rate than you had with your credit cards. It can also help boost your credit score by improving your credit utilization ratio.

2. Pursuing home improvements

If you anticipate some home renovations and need a large chunk of money to cover them, a personal loan can be a great choice. You can use a loan for a number of home improvement projects, such as:

• Financing a new roof
• New landscaping
• Remodeling your kitchen
• Other home improvements that add value

A personal loan is especially helpful if you need the funds quickly or don’t have enough equity to qualify for a home equity loan. Unlike home equity loans, which use your home as collateral, personal loans are unsecured, meaning you won’t risk losing your house if you can’t repay them.

3. Covering unplanned emergency expenses

It can be all too easy to become saddled with unexpected expenses. Examples of emergency costs include:

• Large medical bills
• A high tax bill
• Unplanned funeral expenses
• Lawyer’s fees after a divorce
• Auto repairs

These situations are never pleasant, but a loan could ease the financial burden and help you move forward.

4. Paying for major life events

A personal loan can be useful for emergencies or covering necessary expenses, but many people take out loans to fund major life moments like:

• Weddings
• Family planning
• Dream vacations
• Moving expenses

These are all valid reasons to request a personal loan. Remember to treat a loan like any other line of credit – once the fun is done, you must pay it back.

5. Financing a vehicle

You can use a personal loan to buy a car, but keep in mind that you may not get the best deal. Auto loans use your vehicle as collateral, so interest rates are normally lower than an unsecured loan. However, unlike personal loans, auto loans typically require a down payment.

In other words, take the time to compare rates on both auto loans and personal loans to find the better deal. Personal loans might be a better fit for major car expenses, such as replacing your tires.

6. Making a large purchase

If you need a new home appliance but don’t have the cash readily available, you can use a personal loan to finance a new refrigerator, washer and dryer, or new HVAC system. It’s best to use a loan only for necessary appliances, so that the bigger TV you want should wait until you can pay for it in cash.

3 ways you shouldn’t use a personal loan

While you can use a personal loan for almost any purpose, lenders generally impose one or more restrictions that will likely be noted in your agreement or contract. Not conforming to these restrictions would break the contract and make you subject to legal action and additional fees. Be sure to carefully review your agreement before applying for your loan funds.

A personal loan is best not used for any of the following:

1. College expenses

It’s not illegal to use your personal loan to pay for college tuition. However, doing so usually wouldn’t make financial sense. Most lenders offer personal loan amounts with repayment periods in the 12 to 60-month range and, in general, have higher interest rates than student loan offerings.

When you think about loan forgiveness, student aid and payment flexibility, such as no monthly payments until six months after graduation, it makes more sense to use a student loan through your college or university. If you need help financing your child’s education before college, consider a K-12 private school loan.

2. Illegal activities

It should go without saying, but a lender isn’t going to approve a personal loan for anything that breaks the law. This includes using funds for narcotics or illegal gambling activity. Let common sense be your guide here. If you’re still unsure, review state and federal laws to make sure you’re not taking any unnecessary risks.

3. Gambling

Don’t use money from a personal loan to gamble at a casino or elsewhere. Even if you’re planning to visit a legal gambling establishment, no lender is going to approve a loan for this. Using your loan to gamble would likely constitute a breach of the loan agreement and result in fees or legal action against you.

Reasons not to get a personal loan

While personal loans can be a helpful financial tool, they’re not always the right solution. Certain circumstances or financial conditions might make applying for a personal loan a less-than-ideal choice. Here are some situations where opting for one may not be the best move:

• Your credit score is low: Your credit score is a major factor in the interest rate you qualify for, and a lower score means a higher rate.
• You can’t afford the monthly payments: If you live month-to-month on a budget, falling behind on payments or defaulting on the loan is a real possibility. Defaulting could cause immense damage to your credit.
• Another option makes more sense: If you qualify for another type of financing at a better interest rate, go with your better option. This could be in-store financing, peer-to-peer lending, or even borrowing from an acquaintance.
• You can pay with cash: If you have enough money saved to cover the expense without straining your finances, it’s usually better to pay upfront. Personal loans come with interest, so using cash instead can help you avoid unnecessary fees and save money overall.

How to get a personal loan

Seeking a personal loan shouldn’t be a spontaneous decision. Once you’ve decided you need a loan, compare lenders and offers. You’ll want to work with a lender offering the best rates and terms for your situation, and prequalifying is a great way to estimate your eligibility. Once you’ve chosen a lender, submit a full loan application.

A lender will check your credit history and score and examine documents related to your income and debt to determine whether you can handle another monthly payment.

The bottom line: A personal loan can be helpful depending on your situation

A personal loan can have several benefits, especially if it has a lower interest rate than your credit card payments. However, this doesn’t automatically mean a personal loan is the right choice for you.

Carefully consider how much you need the funds and whether a personal loan will improve or hurt your financial situation. Think about whether you can afford the monthly payments and then compare lenders to find the best terms and conditions. Get started today by prequalifying with Rocket Loans℠.