Should I Get A Personal Loan? 9 Top Reasons | Bankrate (2024)

Personal loanscan 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 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. But you’ll also have to consider your own finances to see whether a personal loan is truly a good idea.

9reasons for personal loans

Personal loans’ fixed rates and stable monthly payments make them simpler to budget for than some alternatives. Quick funding is also a plus if you’re facing an unexpected expense.

These are nine of the main reasons to take out a personal loan. But don’t forget that personal loans have cons alongside their pros.

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 in interest. The average personal loan interest rate just tops 12 percent, while credit cards have an average interest rate of nearly 21 percent.

Two factors help personal loans save you money. Personal loan rates are fixed, making your payment predictable compared to variable credit card rates. You also have a definite payoff date because personal loans are paid in equal installments, with terms typically ranging between one and seven years.

When you pay off multiple other loans or credit cards with a personal loan, you combine them into one monthly payment. That can make your debt simpler to manage.

Another big perk: Paying off revolving credit card debt can give your credit scores a boost. That’s because it lowers your credit utilization ratio.

2. Home improvement projects

If homeowners don’t want to borrow against their home’s equity, they can use a personal loan for home improvements. It’s also a good fit for borrowers who lack 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. 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.
• 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.

You may opt 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.

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. But be aware of what this means for your monthly payment and total interest paid.

Additionally, since personal loans are unsecured, the vehicle won’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 annual percentage rate (APR) for a payday loan can be more than 650 percent, depending on your state. But the maximum interest rate on a personal loan is typically about 36 percent. 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

Local moving costs average between $878 and $2,538, while a long-distance move costs anywhere from $2,700 to $10,000, according to Angi. If you don’t have the cash, 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 while you wait for your first paycheck after 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 potentialfees, you can avoid depleting your savings or using your credit card.

You can even make several large purchases at once and budget for them with one fixed-rate personal loan payment. For example, you could use a personal loan to replace multiple kitchen appliances during a remodel.

8. Wedding expenses

The average couple will spend around $33,000 on their wedding in 2024, according to Zola. 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.

But remember that a luxury wedding is a want, not a need. Don’t let your vision of the perfect day drive you to borrow more than you can afford to repay.

9. Vacation costs

According to a study by Budget Your Trip, the average cost of a vacation is up to $1,991 for one person. 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.

However, we generally recommend against using vacation loans. This kind of debt can weigh your budget down for years after your vacation is nothing but memories.

When to get a personal loan

Some consumers’ finances are better suited for a personal loan. Lenders use factors like credit score, annual income and credit history as requirement criteria. If you’re doing well in those categories, you are also more likely to be able to handle a personal loan.

If you fall into the following financial categories, a personal loan could be a good tool to fund your next purchase, project or life event.

You have a very good credit score or above

According to the FICO credit model — the scoring that most lenders use — a very good score is anything above 740. While lenders may accept a lower score, it’ll be harder to get approved right now and if you do, you’ll likely get stuck with a high rate.

You have an established repayment history

Lenders are tightening requirements to avoid risk, so a long history of positive loan and credit repayment appeals to them. Your credit report includes every reported payment you’ve made, missed or were late on for the past seven years. If your credit history is short or flawed, a lender is likelier to pass on your application right now.

You have a low debt-to-income ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly debt payments divided by your gross monthly income. Lenders often see higher DTI as a potential default risk.

ome lenders or banks require a DTI below a certain percentage. If yours will be below 36 percent even after taking on this new loan payment, you are more likely to be approved.

Your annual income is steady and sufficient

Some institutions require a minimum income for approval, but not all lenders have a specific amount requirement. Generally, the higher your income, the more likely you are to get approved and most lenders allow for the applicant to input multiple streams of income as long as they provide the proper documentation to back it up.

You prequalified for competitive rates

Many lenders offer prequalification, which allows you to check your predicted rates and approval odds before applying. Prequalifying doesn’t impact your credit and allows you to easily compare lenders. If you’re offered the lowest — or very competitive — rates, then you may want to take advantage of that offer.

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 an alternative to a personal loan might be better.

• Your credit score is poor. The lower your credit score, the higher your interest rate could be. If you have poor credit and truly need a loan, 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.

What to look for in a personal loan

Before taking out a personal loan and in turn, opening yourself up to debt, consider the main factors to look for when choosing.

• Approval requirements: No matter what you intend to use your personal loan for, lenders have requirements that you must meet. These can be reliant on your credit score, income or debt-to-income ratio. When exploring lender options, pay close attention to these factors to ensure you aren’t wasting your time when applying.
• Interest rates: Although the APR you receive will vary depending on your qualifications, look out for the range of advertised rates. It will hint at what you might have to pay.
• Funding timeline: If you need fast cash for unexpected medical bills or urgent car repairs, working with a lender that provides quick funding is essential. Some lenders even have funds available as soon as the day you apply.
• Loan amounts: Some lenders offer funding for as little as $1,000 or as much as $100,000. When looking for a loan, seek out a funding source that meets your needs. Note that the lower your credit score is, the harder it will be to access high loan amounts.
• Repayment options: Your repayment terms are the amount of time you have to pay off your loan. Typically, personal loans offer terms between one and seven years. Look for a loan that offers a range of options and fits your budget.

It is important to make a plan to effectively manage your loan once you’ve chosen one. You might agree to automatic payments to avoid missing deadlines, for example.